Economist Roubini says “Go to Cash..market will tumble 20%” Is that what you should do?

May 21, 2010 / Charan Singh

You may have seen this headline on CNBC yesterday… “Stock to tumble another 20%, Cash the safest place: Roubini”

Is that what you should really do? I was disturbed to read this headline because if people do go to cash, the market will tumble a lot. If everyone goes to cash, the market seizes to exist. It is not the most practical advice not only because investors already may have high losses in stocks they own but also because it become a self-fulfilling prophecy.

Then I saw something else under the attention-getting headline. Here’s an actual quote from the article: “Roubini said investors also can use options to hedge against future market risk that he said is sure to come as conditions weaken…”

Now this makes a lot of sense. Think about it…do you want to sell you stocks and ETFs now when you are already losing money? What if the market rebounds? This is why we believe, like Mr. Roubini, that investors should get educated and use options to hedge market risk. A few days ago I blogged about a Monsanto (MON) trade and how I collared (an option strategy) my stock as it started to slide. That stock has dropped about $12 per share since I bought it and because of options used to hedge the risk I am only down around $3.25 per share so far. If experience is any indication, I will be able to close this trade for a profit soon because of the use of options and our unique adjustment process.

But options are risky and complicated, right? WRONG! Options MAY BE risky in the hands of someone who does not understand them well. And options are not that complicated if they are explained patiently and over a period of time. If you understand the full potential of options, you can protect your portfolio and take advantage of the increased volatility in the market place today.

But buyer beware! Many options education companies do not teach options the way they ought to be taught, in my opinion. I formed that opinion after becoming a student of other option educational companies before I came here to the OptionsAnimal community. Most companies out there are telling their students to use stop losses and get out for a loss if a trade goes in the wrong direction. We never use a stop loss to manage the risk in a trade. We use options to hedge risk and are able to turn most losing trades around and close them for profit.

Most educational companies are also not sharing their own real, live trades as we share every week and every month on our website. We believe that without watching your coaches trade their own money, you will never be fully confident in your own ability to make money.

If you are agree with Mr. Roubini and want to become world-class in your knowledge and application of options, take the first step by talking to our staff today. Learn more about the unique adjustment process we teach and what it can do for your portfolio.

Charan Singh
OptionsANIMAL Instructor

Link to the CNBC article: http://www.cnbc.com/id/37259541