Flexibility and Bear Market Profits
|
|
|
 |
|
|
|
Real-Time Protective Put Risk Graph, ToS Platform
(Click to Enlarge)
|
|
|
|
The six-step process uses risk graphs like the one above to
simulate profit at all prices and determine the round-trip cost of
using put protection. The process derives entry and exit prices
before initiating the trade.
|
|
|
|
 |
|
|
History of Protected Put Trades
(Click to Enlarge)
|
|
|
We bought IBB (a biotech ETF) at the end of a rally in 2008. As
the price fell, a put purchase stabilized profit (blue line). When the
ETF fell off a cliff, selling the stock and keeping the put generated
further gains.
|
|
|
|
The dot-com and housing bubbles, faster world-
wide markets and volatile trading vehicles have
changed investor psychology since the
2000 crash. Diversification is less effective and
long term holding without a plan to sell creates
enormous risk.
The result is short rallies and slippage. If
a stock moves 10%, and you buy after a 3% gain
and sell after a trend break and a 3% drop, your
net gain is 4% before commissions. If the market
moves 20% and you gain 5%, that’s too many
trades and too much slippage.
Put Protection Can Tame Volatility. Puts
protect what you own by inexpensively
offsetting losses in the underlying stock. You
keep gains and dividends and gain time to make
long-term portfolio decisions. Protecting
individual positions enables hedging of an entire
portfolio in uncertain markets. The result is
tighter stops, less slippage, and rational decision
making.
But options trading has its own risks.
That's why you should manage with a state-of-
the-art trading platform. The ETF-Letter
introduces you to options and gives you a
six-step method for buying the right ones and
buying and selling them profitably.
Help is available. With your ETF-Letter free
trial, you will receive Protective Puts as a
Stop-Loss Replacement, a 40 page e-book
that spells out in detail option basics, how to
protect a stock with puts, use of an advanced
trading platform, and how to hedge a portfolio of
protected funds.
|
|
