How You Can Protect Your Stocks

Stocks made a strong upward push on Tuesday, but be aware that stocks could see some profit taking in the subsequent session, as has been the case after previous spikes. Given the uncertainties out there and the fact that oil could turn back up, there is reason to be cautious.

Given this, there are ways to protect your stocks or portfolio against major downside moves. You may not be able to purchase direct insurance for your investment portfolio like you can with your home or valuables, but by using options, you can create a hedge to protect against potential capital losses. It makes sense to me and should to you. The fact is that investment assets are valuables, probably having the first or second largest value after your home. By the time you retire, the value of your investment assets would be probably far in excess of your home value. So this makes protecting your investment assets that much more critical, so you can enjoy that retirement.

You can establish put hedges for a single stock or a basket of stocks where buying put options to match each stock would be both economically infeasible and improbable due to the limited selection of put options. If you own a basket of stocks, look for a stock index option that has a high statistical correlation with your particular group of stocks.

Holders of technology stocks, for instance, could buy put options on the NASDAQ-100 Index — representing the 100 major technology stocks trading on the NASDAQ. Just flash-back and think about how handy these index put options would have been when the NASDAQ Composite was trading at over 5,132 in March 2000, just before its fall into the abyss.

You could buy put options as a short-term or long-term hedge or insurance against a downturn in a stock or market index. For instance, if you were long 1,000 shares of Quiksilver, you could protect this holding against any weakness by purchasing 10 put option contracts (each contract represents 100 shares) in a hedging strategy termed a “Put Hedge.” This would allow you to protect against any short-term decline in the stock, while retaining the upside potential.