20 June 2014

CREATIVE WAYS TO PROTECT PORFOLIO

After posting gains in a portfolio, the last thing you want to do is give them back. Protecting your stock portfolio is an extremely important part of portfolio management. There are several ways to approach this  some of the most common include buying put options and buying inverse exchange traded fund (ETF). It is necessary to understand how each works and how well each achieves the goals of protecting portfolio gains. 

Types of Protection and Making the Right Choice

The consideration to buy protection is typically due to a fear that something negative will happen in the short term which will impact your portfolio.
Stock Specific Fears:

If you have stock specific fears, then purchasing put options to hedge against a stock’s decline is an appropriate action. Buying a put option gives you the right but not the obligation to sell 100 shares of the underlying equity at the set strike price. Therefore if you are concerned about short term volatility you could purchase puts in the amount equal to the quantity of underlying security with a strike price equal to the minimum price you are willing to continue holding the stock and for the time frame you are concerned the volatility will occur....

Industry or Market Specific Fears:

If you have fears that an industry or the broader market might experience some near term slow down, you have a few options. The first is achieved through buying a put on a sector or market ETF. Find an ETF that contains stocks that match your holdings in similar weights for a sector that in turn matches your holdings on a broad market basis. 


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