IS IT TIME TO SELL
The 1 year return for the S&P ASX 200 (ASX: XJO) is approximately 18%. So is it time to sell and take profits? The fact is nobody really knows! If you sell and the market continues to rise you will miss out on more gains however if you continue to hold and the market falls you will give up some or possibly all of your gains.
So how can investors overcome the unknown and create more certainty around returns? Through the use of a collar. A collar around a share is simply the purchasing of a protective put option and writing of an out of the money call option over the shares.
For example; BHP has risen approximately 67% over the last 12 months and at the time of writing is trading at $26.80.
Collars can be tight or loose & over a short or long period of time depending on the investors risk & outlook for BHP. For this example I have used May expiring options.
Buy BHP May’17 $25.00 Put @ 89 cents per contract. If the investor owned 1,000 shares the cost would be $890.
Sell BHP May’17 $29.00 Call and receive 55 cents in premium per contract. If the investor owned 1,000 shares they would receive $550.
The result being that the client pays 34 cents per contract or $340 to protect their 1,000 BHP shares at $25.00 until the 25th May. Should BHP rise above the $29.00 the investor is obligated to sell at $29.00. Should BHP continue to trade within the range of the collar the options expire worthless, the investor maintains ownership of BHP and can purchase another collar.
The investor can reduce the cost of the collar by selling call options closer to the money. The strike price of the sold call option should be a price the investor is comfortable to sell BHP at.
Shares tend to go down the elevator shaft and up the stairs…. Collars may not be suitable for everyone however for investors that want more certainty around returns and want to reduce risk then this strategy may be appropriate. Unfortunately many investors only think about protection after it’s too late.
For more information about protecting your portfolio contact HarbourSide Capital at email@example.com or call +61 2 9432 7850.
www.harboursidecapital.com.au is a provider of managed discretionary accounts
Source; Interactive Brokers
Harbourside Capital Pty Ltd (ACN: 166 765 537) an Authorised Representative (AR No. 448907) of HLK Group Pty Ltd (ACN: 161 284 500) which holds an Australian Financial Services Licence (AFSL no. 435746). Any information or advice contained on this marketing material is general in nature only and does not constitute personal or investment advice. All securities and financial products or instruments transactions involve risks.