How Do I Protect My Portfolio Using Options? ?
When you set up your investment portfolio, it is crucial that you have a plan for protecting your returns. You never know when the next big market crash is headed your way and you want to be prepared at all times. Many investors view their portfolio as their biggest asset and the last thing they want is for an unfortunate event to ruin their years of hard work and investing. One of the best ways to protect your portfolio is through the use of options.
There are two types of options: A call and a put. A put option is a contract that will give you the right to sell shares of a stock for a predetermined price by a certain date. Futures will not work here because those contracts require an agreed-upon obligation to buy or sell at a certain price on a pre-determined date.
With a put option, you are betting against a stock with the assumption that it will lose value. Put options can be viewed as an insurance policy for your portfolio with a deductible. Protection is not guaranteed, yet the potential loss is reduced. It is far better to take a smaller loss than a larger one.
If the stock price falls below your predetermined price, you can sell your shares and make a profit. For best results, you want to use a put option that is not too expensive and allows for sufficient time to play out. If you wait until the market becomes too volatile, it will be far too expensive for you to get an affordable put option.
If you do not want to purchase puts for each stock, you can opt for buying index puts. The only catch to this strategy is that you want to pick an index that best represents the stocks in your portfolio. A portfolio based on large-cap U.S. stocks is best suited with something like the S&P 500 SPDR.
Many people put off the act of covering their portfolio until it is too late. By the time they decide that buying put options was the best way for them to go, it has already become an expensive opportunity. You need to keep your portfolio safe from the known threats AND the unknown threats.
Do you agree with using put options as a strategy for protecting your portfolio? What strategies do you personally use? Share your insights on social!
Used correctly, stock options can increase your profit potential exponentially while also reducing your risk significantly. Our Rich Dad Education trainers will introduce you to options basics and explain how you can control a stock for a fraction of its price, profit from stock you don't own, and make money when the price of a stock is barely moving at all.
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