The story of the woes in Europe has seemed like one of those awful movies that gets nominated for best picture.
I am not insinuating that the Academy members pick awful movies, but rather that the storylines of many Academy Award-nominated films are not always cheerful.
The hero is facing insurmountable odds; you rally behind her, and then watch her fall and hit a stool and end up getting a mercy killing from none other than her trainer and father figure Clint Eastwood. Whether Greece is Jack Nicholson in “One Flew over the Cuckoo’s Nest,” Hillary Swank in “Million Dollar Baby” or Jim Carrey in “Dumb and Dumber” remains to be seen.
Greece’s storyline continues to look about as unreal as a Hollywood movie.
We keep seeing numbers that can’t be real…right? Then again those numbers have proven to be real.
They go on vacation HOW many days out of the year? They haven’t paid taxes in HOW long? The unemployment rate is WHAT?
The storyline is definitely filled with intrigue. And of course we have villains and heroes on white stallions. Enter Merkel and Sarkozy. Enter Geithner and Bernanke. Who’s the villain and who’s the hero?
One thing is for sure, although they seem to be working on the same team, I get a feeling that there is a double agent among them.
Maybe this production isn’t going to get nominated for an Academy Award after all and going to turn into a James Bond movie, and by Bond I mean 007, not any type of debt instrument. (No pun intended, I promise.)
The point I am trying to make here is that for many of us as investors, these stories do not seem any more real than any movie we might watch at the theater. Instead of red carpet we get press conferences. Instead of acceptance speeches, we get more press conferences.
The problem here is that this isn’t a Hollywood production. This will impact our performance in the market and our economies stability.
So what should one do?
I have heard predictions about this year’s market performance that range anywhere from 20-30% more upside to as much as 50% downside. With wild swings expected like this, the only reasonable way to invest in this market is with some type of position that allows for a participation in a bullish market. At the same time, there is a need for a tool that will give some type of downward protection against a falling market. The wait for a pullback idea has hurt for a couple of months now while investors who are sitting in cash are watching the market run away from them, but the fear of a BIG pullback is keeping investors on the sidelines.
One common strategy that I like to use in times like this is the protective put, or married put strategy. The married put is an option strategy whereby an investor, holding a long position in stock purchases a put on the same stock to protect against depreciation in the stock’s price. Potential profits or losses from a married put are created from the net effect of a long position in both the put and its underlying equity. The strategy builds a floor, allowing unlimited profits in the equity while limiting the potential loss. Should the stock price decline below the strike price before expiration of the option, the investor could either exercise the put option and sell his or her stock at the strike price, or simply sell the put option (at that point for a significant profit) and hold onto the shares. Should the stock price increase above the strike price, the option would not be exercised and the investor could sell the stock at the higher price and recognize a profit if the stock price is above the overall cost of the position.
In essence, this is like purchasing insurance against your stock. We’ll call this a low risk option strategy because this type of strategy allows you to enter this market and not fear that the end of this Greek tragedy is going to be heart wrenching and dramatic for your portfolio.
OptionsANIMAL CEO and Founder