Options are the only remaining strategy
Today's Financial News - Posted January 20, 2009
They may be cheering on Pennsylvania Avenue, but they are crying on Wall Street as another horrific round of news wipes out billions in investor equity. The only way to protect yourself from this mess is by using a savvy options strategy.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): Barrack Obama is now the president and millions may be celebrating in the streets of the nation’s capital, but the amongst all the pomp and circumstance lie some horrifying issues.
With an inauguration day like no other unfolding in Washington, I cannot help but think the level of celebration is a true measure of the nation’s collective despair. We line the streets, elbow to elbow, to be part of what many view as the nation’s last line of hope.
It is sad to think the celebrations are inversely proportionate to the level of fear and national misery.
Nobody knows misery lately like a Wall Street investor. It has been wave upon wave of bad news and failed expectations. Over the course of 100 days, Americans have lost hundreds of billion dollars in wealth.
No celebrations on Wall Street
While today may go down as a great one for the nation, it will be infamous amongst the financial world. All across the globe, currencies are faltering, prices are plunging and historic financial institutions worry if tomorrow will come.
Dare to look at the news hitting the world’s banking sector today. There are rumors that Bank of America (NYSE:BAC) may need as much as $80 billion in capital in order to stay in business. Its shares were down by as much as 22% today, just a few days after its latest multi-billion-dollar infusion from Washington.
Across the pond, the Royal Bank of Scotland (NYSE:RBS) has delivered an uppercut to investors’ chops as its share price fell by over 70% over the last two days on fears of nationalization after posting a whopping $41.3 billion loss for 2008.
Back home, State Street Corp. (NYSE:STT) is worth half of what it was when the markets closed for the holiday weekend on Friday. Shares dropped by about 50% after the company released a litany of risk factors it will face in 2009. Nearly $8 billion in shareholder equity vanished overnight.
To show just a sliver of the financial ramifications today’s decline will have on the nation’s economy, look at a couple of the major investors in State Street.
As of the end of September, T. Rowe Price owned more than 20 million shares of the troubled company. On Friday, that position was worth close to three-quarters of a billion dollars. Today, the company can claim a stake worth just $380 million.
Unless it sold off some of its stake since the end of the third quarter, Massachusetts Financial Services owns over 17.5 million shares of State Street. That means its position dropped by over $300 million in the last 24 hours.
Those figures represent just two institutions, investing in just one company, but the individual investors their losses will impact is likely in the tens of thousands. Add up all the investors reeling in pain from the countless losses adding up today and you have inconceivable pain.
Easy moves to protect yourself
So what is an investor supposed to do to protect himself from this dangerous exposure?
The answer is fairly simply. If you have not thought about using options to protect your portfolio, now is the time to do it.
Since we rang in 2009, the CBOE’s volatility index (VIX) has jumped by nearly 30%. That means options prices are soaring and the investors that made the right moves are reaping huge rewards.
Going forward, however, you should not be concerned with getting rich quick through the derivatives market. You simply need to use it to protect your investments. It is a technique that is far easier than trying to select a few winners out of a horde of losers.
By wisely investing in an array of calls and puts, based on major indices like the S&P 500 you can effectively hedge your portfolio against the kind of drops that are destroying so much wealth today.
There is still plenty of money to be made, even as this market plummets. But you need to be wise with your investments and be sure to do your homework.
The nation has new leadership, but Wall Street has the same problems it did last week.
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