Back in 2004, I knew many people who owned a home or were planning to buy a home in the South Florida area. Knowing that area well, I saw those who already owned their home for a while were doing very well on it and it was the time to sell and take profits while it lasted. At the time, mortgages were being handed out like candy. As long as you had a name, potential buyers were getting approved for a loan. I realized this when a law student friend of mine, making $10.00 an hour as a library aide, got approved for a $350,000 mortgage in West Palm Beach. Another friend of mine who purchased a townhouse in 1997 for $85k was now going for $260k. I don’t care what the situation is, if you’re making that kind of profit in less seven years, it’s time to sell and move on, especially on such a small investment to begin with. The house was already paid for. I implored my friend to sell her place immediately. To this day, she always brings that up to me and the mistake she made. As expected, the 2008 market crash happened mostly to these bad mortgages that were disasters from the start. I have personally never blamed those who were into the credit default swaps. Blame the banks and mortgage companies who gave out these mortgages in the first place. The point here is to be able to foreshadow the obvious and to not be greedy.
However, there are times like today when the stock markets are very jittery and volatile. Is this a reason to completely sell all of your stock? I do not believe so, but there is a way to protect your investments in case there is a massive sell-off like 2008, and it will cost you very little to do so.
Over the last few weeks, there has been a lot of volatility in the markets, mostly on the downside. With the economy in China becoming an issue and the very good chance that there will be an interest rate hike soon, market direction is a bit uncertain. Going back to 2008, right before the markets crashed, I also told all of my friends who held stock positions to back them up if their intention was to stick it out through the downturn. The easiest way to do this was by simply using put options that were out-of-the-money. For example, one person I knew held a rather large position on Citigroup (C) right before the markets crashed. Well, we all know what happened to that stock (and all bank stocks at the time).
Put options are an excellent way to hedge your portfolio if you have any concern that the markets are going to fall or if there is any hesitation on keeping a stock you are worried about. The best thing about them is that they can be very inexpensive when using out-of-the-money puts. For example, let’s assume stock “XYZ” is currently trading at 50.00/share and you have a position size of about $50,000 into the trade with long stock. However, you like the stock itself long-term and dividend the company provides and do not want to sell it. The smart decision would be to buy put options that do not expire for 4-6 months. If the stock is at $50.00, I would use $42.00 strike price put options to protect myself. During the 2008 market crash, not only would have investors not lost much money at all even as the stock itself fell, but they often profited because those put options became so much more valuable than what was paid for them, that they even surpassed the loss on the stock. held.
In times of market uncertainty for stock investors (and traders), put options are an often under-used and unknown tool that can help you protect your investments. To buy or trade put options, you only need a Level 2 trading Level, which is for the most part automatic if you already have bought and sold stocks. I highly recommend opening up a stock options trading account if you do not already have one.
If you have any questions, you can contact me here on SS. Thanks.