Protecting against the unexpected...
With markets becoming more volatile many investors are seeking ways to protect individual shares or even entire portfolios against the unexpected. But how can the average investor protect their portfolio against unexpected events? Through the use of Put options.
What is a put option? A put option gives the buyer the right, but not the obligation, to sell their shares at a specific price and date in the future, guaranteed by the Australian Stock Exchange (ASX).
For example; Over the weekend Chinese authorities detained 18 employees of Crown Resorts (ASX:CWN) an event no one could predict or foresee. This unexpected event caused the share price of CWN to fall dramatically closing down 13.9%
Shares tend to go down the elevator shaft and up the stairs….While many investors will do nothing except hold and pray for a recovery in the share price, it will take a gain of approximately 16% (before costs) to get back to where it closed on Friday and a gain of 24.5% to get back to the most recent closing high of $13.89. This could take some time, time many investors don’t have.
However, had investors purchased put protection investors in CWN could have turned a negative event into an opportunity. For example;
Sell the put option for a capital gain offsetting the majority of the loss in the shares OR
Exercise the put option. The exercise would result in a sale of the CWN shares at the protected level allowing the investor to re-purchase CWN at the lower price, thus re-setting their cost base and allowing the investor to profit from the potential recovery in CWN OR
Exercise the put protection and use the proceeds elsewhere
Put protection may not be suitable for everyone however for investors that need growth from the share market but are nervous about investing in shares, put protection may be a way of achieving growth without the traditional risks of buy and hold. Unfortunately many investors only think about protection when it’s too late.
“Only when the tide goes out do you discover who has been swimming naked” Warren Buffett
For more information about protecting your portfolio contact HarbourSide Capital at email@example.com or call +61 2 9432 7850.
Harbourside Capital is an Australian provider of Managed Discretionary Accounts.
Harbourside Capital Pty Ltd (ACN: 166 765 537) is a Corporate Authorised Representative (CAR 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 material is general in nature and has been prepared without taking into account your objectives, financial situation or needs.
Source: Interactive Brokers