The history of investing got my attention many years before I ever bought a single share of a publically owned company. I enjoyed listening to the stories
from folks I knew and reading books by well known investors Gerald Loeb, Bernard Baruch, Jesse Livermore, William O’Neil, and more.
When I became an investor, I was a fully employed woman focused on earning income and being responsible for the Assets and Liabilities that were being
created in my life. Abbott Laboratories was my long-term stable employer who provided me with opportunity, growth, and financial security. Life is GOOD!
The late 1990’s was a Wall Street cycle of the Tech Bubble expansion where everyone in the world was talking about ticker symbols that would ‘make them
rich.’ What a huge atmosphere of putting away some extra money into the stock market had developed in our world! Abbott Laboratories guided me with my
Individual Retirement Account that had been created within the organization. They even matched my personal contribution up to a decent level in excess of
my work compensation. How nice!
Did I expect the bubble to burst? Heck no! I’ll never forget one quarter where I received my IRA statement that showed a loss of capital that was
completely shocking and physically upsetting. The amount of money that I had placed into the IRA over four years was lost within two months. I was the one
who had worked hard to build up financial security and yet I was the one who was being financially hurt by the bear market at that time. What could I do?
Don’t I have any right to protect my savings so that my future would be financially stable? If I experienced some damage to my automobile or home I had
insurance that would help protect these assets for me. What is the insurance for my stock investments? …………….OPTIONS
Options involve Calls and Puts where I can buy them or sell them, depending on what I am trying to achieve by using these tools. The complete education of
their behavior, rights and obligations has been a fully beneficial cycle in my investing life. An important characteristic of all options compared to
stocks is TIME. Each call and put option is a legal contract that will expire at a given point. Like any other asset, time is money. So what’s the big
insurance? The LONG PUT. Could I hold insurance on any stock I purchased? NO. Approximately half of the equity universe offers options to be used for
protection (or other purposes.)
If I buy a long put (LP) I have the Right to Sell the stock at a given price during a given period of time. What price? What period of time? That’s up to
me. Options have ‘strike prices’ and ‘expiration dates’ that I evaluate and select from. What would guide me in my selection? My main objective is to
achieve an open stock position that is at a level of RISK that won’t seriously harm my financial savings. (My history of huge percentage losses taught me
that!)
Example:
PFE (Pfizer Ord Shs)
Long Stock @ $29.04 per share
Strike Prices
$1.00 wide, between $12 and $40 (The chosen strike is giving me the right to sell the stock at $12.00 per share or $40.00 per share, or any dollar
between…… math would tell me how much loss or protection the contract provides.)
Expiration Period
Six days? Twenty-seven days? Fifty-five days? Six-hundred-and-one days? (Some equities offer very long-term contracts known as LEAPS. The longer the
contract, the more expensive the insurance will cost.)
Cost of Insurance
June 2013 strike $30.00 @ $1.32 per share (27 days until expiration)
January 2014 strike $30.00 @ $2.78 per share (237 days until expiration)
January 2015 strike $30.00 @ $4.85 per share (601 days until expiration)
If I were to buy 1000 share of PFE @ $29.04 (Capital Investment of $29,040.00) and add insurance through January 2015, what would my risk be?
10 LP’s giving me the Right to Sell the stock at $30.00 would cost $4850.00, bringing the total investment cost to $33,890.00 for the long stock and the
insurance. Since the January 2015 LP contract gives me the Right to Sell the Stock at $30.00 per share for the next 601 days, I could NOT lose more than
$3890.00 of my investment (11.5% of the investment.) In addition, some equities pay dividends and PFE is one of these. There would be an additional income
of $0.96 per share per year for PFE, which means that over the next 601 days the dividend payment would be approximately $1440.00 lowering the risk to
$2450.00 (7.3%.)
Applying investment insurance through the use of long puts is a stable benefit. I’ve provided a simple explanation here. There is more to learn about puts
(and calls) and I would recommend all interested take the time to investigate the criteria that establishes options value, rights and obligations. In all
the sources I’ve investigated OptionsANIMAL.com is the most thorough curriculum possible!
Emilu Bailes
OptionsANIMAL Instructor
Options Trading Resources
Options Trading Resources
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