This week has seen a significant shake of confidence toward the equity market. As always, the informed investor and trader has choices under such circumstance. These choices are critical, when it comes to your wealth creation. This week, we entered into a couple of options trades, using Put Options to assist.
What is a Put Option?
A put option – in its simplest form, is like owning an insurance policy – if the price of the asset falls, the value of the put option increases. As a result, they can be a little tricky for the newer trader to get their head around ie making money from a fall in the market.
“Weaker” economic growth from China, albeit at 7.7% growth, a big sell down in Gold and a mixed bag from the US reporting season, saw many investors running for the bunker, hard hats on. As I referred to in my China article, earlier in the week, this is not a bad thing, with markets taking a breather and much of the nervous support, well and truly being shaken from the tree.
Regular readers will know we have been a big fan of trading calendar spreads in recent months – instead of buying the stock, we buy a call option and sell a shorter dated call over it, to provide a lower cost and/or more leveraged trading opportunity. Given the recent market nerves, we have instead bought longer dated put options, selling the shorter dated puts as cashflow. This is a classic example of adjusting a strategy to genuinely suit the market and its conditions. Call it Darwinian, but adapting to conditions is the key to survival.
These positions are still running and currently in profit. With an early options expiry in Australia, next week, as a result of ANZAC day on Thursday, the revised expiry date of Tuesday will give us and our clients, the potential opportunity for banking healthy profits early next week.
An alternative use of Put options, is buying the put for protection – a valid portfolio strategy – albeit at the cost outlay of buying the Put/insurance. To overcome this cost, we often use a collar – that is, we buy a put and offset the cost of the put purchase through selling a call option. This provides great peace of mind for the portfolio investor, and should be achievable without using any additional funding.
These are a smattering of the options strategies we are using right now – we also have stock repairs running, not to mention some more aggressive short terms calendar spreads too. For the first time in a good while, this market has provided an excellent opportunity to once again reinforce why we are options specialists – they simply provide so much flexibility for the trader and have the potential to adapt to almost any market circumstances – fulfilling investment objectives from Cashflow and protection, through to directional profit. Cliché it may be, but they simply provide the trader with more “options”.