Options Insurance: Protection from all forms of risk
Today's Financial News - Posted August 24, 2009
The markets continue to move forward, even as investors ponder why. If you have not insured against a sudden turnaround, now may be your last chance. Obama is only on vacation for a week.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): One of the first things any novice investor learns is the trade-off between risk and reward. The correlation between the two factors is vital to understand, yet is rarely, if ever, mastered.
If the markets could perfectly predict the dozens of risk factors involved in pricing an asset, my job would be incredibly boring. With no mistakes to fix, the markets would never stray from a linear path.
Fortunately, the risk factors affecting today’s investor are growing by the session.
One of the most common risk factors has nothing to do with the world of finance. Instead, the topsy-turvy realm of political maneuvering is wreaking havoc on traditional means of calculating values.
Think about this. The SEC requires companies to publicly disclose just about every move they make. Thanks to Sarbanes-Oxley, companies traded on Wall Street have more red tape to juggle than any time in history.
But what about those politicians we pay so much to rule us?
What organization is auditing their statements and raising a red flag when they are caught cooking the books?
Look at the headlines today and you will see exactly what I mean.
We have the expiration of the market-manipulation that was Cash for Clunkers. We have a potential total revamping of our healthcare sector. Congress is asking just about everybody how much they make and how they get to work every day. And don’t forget the SEC’s desire to drastically change the rules regarding how we short the market.
To top it all off Bernanke and Geithner are constantly manipulating the value of the dollar, the fundamental asset investors use to measure everything they do.
It is impossible to build anything when the ground you are working on is constantly in flux.
Just ask Halliburton
So what’s the solution?
Because cheaters will always cheat, politicians will always lie and the markets will always move, the only solution is to be prepared for anything.
The best way to do that is through the derivatives market.
Options give you the right, but not the obligation, to buy or sell an underlying asset. Their flexibility gives investors an opportunity to protect themselves from just about any situation.
If you have a high-risk long position. Protect it with an options play that will pay off in the opposite direction.
Sure, it will cut into the top end of your profit potential, but if done right, it can eliminate any risk, even political risk. It is insurance worth paying for.
Right now, the financial opinion pages are filled with commentary detailing why the recent run in the equities market is overdone. Some doomsday pundits are calling for a re-testing of the March lows while others are calling for a double-dip depression.
If these folks are right (with today’s political environment, anything can happen) all those gains that have miraculously appeared in your monthly statements over the past four months could disappear overnight.
Not again!
How do you find protection from a broad-market selloff? Easy. Buy S&P 500 puts.
Right now, the critical index is printing at 1025. To protect your portfolio if that figure plummets, turn to the much-touted realm of SPDRs (NYSE:SPY).
Right now, thanks to the leverage of options, you can protect yourself from a fall to the 600 range for pennies on the dollar. Or you can find a safe haven in the 800 range for just a few bucks more.
Over at TFN Strategic Trader, we are not short on the entire market, but a few critical sectors. It allows us to maximize our profit potential and minimize our cost of protection.
To find out exactly which options contracts should be in your portfolio, simply click here.
Political risk levels are at all-time highs. If you have not created your insurance policy to protect you from the potential fallout, do it now.
Obama is only on vacation for a week.
Next Article: TFN eNews 08/24/2009: The End of the Russia Gambit?
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