I want to catch the big runs in the market up but, I don’t want to lose big. Is that not the key to investing? Notice I didn’t say trading but investing. Investors tend to be big picture thinkers and look at longer time horizons. We all want to get the big hits like GOOG, AAPL, BIDU, or PCLN. Don’t forget you can also double your money with a F, NVDA, or ZION. But in real life we want to get GOOG at $500 and run it up to $800 like it’s trading today. To catch AAPL today at $430 and watch it run back to $705. Maybe BIDU at $90 and have it run back to $155 or PCLN at $719 and run to the $1000 level. Maybe I am dreaming but aren’t we all in the market to hit it big and make our dreams become reality? Let’s go make some money in a bullish market but…..
But what if we had bought AAPL at $705 and it falls to $430. There is significant risk in investing when the market is at all-time highs. With all the headline risk, talking heads mentioning a pull back on TV, or the fact the U.S. debt and government risking our reserve currency status. Don’t forget about Italy now throwing Europe into a tailspin. China might not be growing as expected and Japan still hasn’t grown in decades. Yes I want big money but there is also big risk in investing. You can’t make big money if you lose your trading capital in a big hit.
So now that we know the problem how do we fix it? Ever say, “I can’t seem to catch a bottom on a stock to save my life”. I never would have thought to see GOOG at $560 in July 2012 or AAPL at $430 today. If I can admit that I can’t predict the stock price I have to face some hard facts. Do I forget the dream or is there something I can do to hedge my risk? After decades of trading in the market I’ve decided to use my options. Some consider options a risky word in the equity world. Those are the ones who chose not to spend the time or money to educate themselves on how to hedge their risk in the market using options.
I’ve chosen to use options as insurance on stock. I’ve held AAPL and GOOG on the way down. You can’t catch up days in the market if you’re not invested in the stocks. I am ok holding to big names if I have the right to sell the stock at the highs it used to trade at. The long put acts as insurance on stock. I buy the right to sell my AAPL stock at $700 and now I am able to make up some of the downward movement. Of course the market will wipsaw you around as we become a more global marketplace but that’s why you hedge risk. Experience teaches you more about your risk tolerance and when to take your insurance on and off your stocks.
The best part of making up some of the downward movement isn’t lowering your cost basis although that helps. It isn’t being able to sleep at night. It isn’t even the fact you are in the market so you won’t ever miss the pre-market run on one of these stocks. For me the best part of hedging risk is the fact that these stocks will runs back up to their highs and every penny made on the way down is profit on the way back up. I will get a great run and maybe many runs in stock ownership over my investing life. The reason why, I am in the equities and don’t have to guess when a run will occur. Here’s to big dreams in the market.
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