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I read an article “Why Stocks Are Riskier Than You Think” on Monday
March 12, 2012 Edition of Wall Street Journal in the Journal Report
section. It is quite interesting.
The article mainly talks about stock investment and the risk
associated with it. Buying and holding stock for the long term is not the
answer to a profitable result since time frame varies with different age
group. There are always risks in a specified time frame and if we don’t
know how to handle them, loss will follow. The authors do not believe in
home runs. They are strong believers of “trade off”. We gain some and
give up some. The main point is aiming for profit but also has a
protection strategy in place just in case of a financial catastrophe. We
need to have a clear and realistic goal for our financial future. We all
want to get maximum return of our investment but since we are not living
in a perfect world, it will rarely happen the way we dream of.
The interesting point of the article is the authors mention about
option trading as a way to protect our stock portfolio in addition to
buying a hedged fund. They go on and give an example of Zero Cost Collar
Strategy associated with SPY, an ETF that tracks Standard & Poor’s
500 stock index. In the example, they talk about
buying SPY at its recent price of $136.41/share then buy a back month
$116 put for $2.16/share to make sure the loss is no more than 15% of the
original investment. To finance
for this put purchase, we sell back month $143 call for $2.17/share. With
this strategy set up, we have our SPY investment protected at $116/share
and our profit capped at $143/share. There are many strategies to protect
our stock investment and Zero Cost Collar is one of them. Personally, I
think this is the way to invest stock. We have our capital protected and
to trade off, we cap our profit potential. The beauty of this strategy is
it costs us nothing to put it in place. We sleep better at night knowing
our investment is protected in case of a market free fall in a time frame
we feel comfortable with.
I noticed CNBC, a financial television network, occasionally talks
about option strategies during their broadcast and now, a well known
financial newspaper also mentions about it. I remember one of the option
radio talk show host once said today retail traders are a lot more
informed and smarter in their investment choices. To me, that is a good
sign. The public should be aware they do have choices to fit their
investment needs.
To close this article, I like to quote one paragraph in the Wall
Street Journal article titled “Why Stocks Are Riskier Than You Think”:
“But when you’re aiming to meet your aspirational goals, there is a way to limit your
downside risk by using instruments that let you limit your losses at the
cost of some upside potential. You can do this through purchases of
options, or you can buy mutual funds that use complex hedging
strategies.”
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