Do you know how to insure your investment portfolio against losses? We do.
Would you ever buy a house without also buying homeowner’s insurance? Of course not. Many won’t even buy a new smartphone without also buying phone insurance. Yet, people invest their life savings with no protection of any kind. Can you afford to ride out another 2008? Do you want to ride out another 2008?
Serious investors utilize what’s known as protective puts. Protective puts are commonly defined as a type of portfolio insurance. If the value of your stock goes down, then the value of your protective puts will move higher. It is a relatively easy idea to understand. Protective puts are readily available in the equity options market. Strangely, they are rarely used in what I would term as retail accounts.
This gets even better! There is a methodology in which you can purchase protective puts at no cost to you. It’s known in the industry as a cashless collar. Here’s how it works. Sell a covered call. The income generated from the covered call is then used to purchase the protective put. This is like purchasing homeowners insurance and receiving a 100% rebate on the premiums! We take advantage of this strategy all the time. It has worked great for us. It is a wonderful feeling to know you have portfolio protection when the stock market is falling.