Insure Your Shares
There are so many investors out there, especially the mum and dad type investers that have bucket loads of cash tied up in shares which is all good. But how many know that they can be insured just like a house. This is what option trading is all about and it is such an easy process to undertake.
If you recall, buy buying a put gives you the right to sell a parcel of shares for a specific price.
Anyone owning a home, or a car or anything else of great value 99 out of 100 would have insurance. So why not unsure your stock portfolio as well.
If you own stock that cost you $10.00 per share, then buying a PUT option with a strike price of say $9.00 allows you sell your stock for that price no matter where the current price is. So even if the stock dropped to $2.00 you have effectively locked in a maximum loss of only $1.00. Ok you might be thinking you have spent extra of you capital to buy the Put (the insurance) but hey… that’s the cost of insurance, you’d do exactly the same when insuring you house. But also consider this. Remember if you have bought a PUT then as the stock decreased in value the price of the put increases which can also off set any losses.
So if you are really attached to your particular shares and the stock drops, then rather than exercising your option to sell the shares you could cash in your PUT option for profit and take out further insurance at a suitable strike price. Remember the strike price is the stock price value that the option is related to.
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