Okay okay, by no mean i want to be the jack of all trade. However, I do believe that as an investor, your knowledge has to be well rounded and be able to spot the opportunity and have the right tool to execute the decision.
In my personal opinion, that opportunity is Oil.Oil has hit 11 years low by the time i am writing this article. So is it possible that i want to ride the train of oil all the way back to the $100 price range, and in the same time, able to protect from losses if the price of Oil will go down to $10?
Yes yes and yes It is possible with option. Today i will explain put option.
Since i’m a RE guy by heart, i will use RE as example. When you buy a house to either live in or invest, do you by insurance? I bet most of us do, and it’s a must with mortgage. What is shocking me is that most people have their entire financial life in the stock market and yet they bought no insurance, not even a stop order. it just doesn’t make sense and it drives me nut. How the hell you are be able to sleep at night knowing the entire portfolio could technically go to Zero the next day?
Put option is one of the simplest tool professional trader use to protect him or herself from large loss, May be we should all use it too.
You can google “protective put” and figure out all the detail. I will just put it simple like this: for every 100 share you buy, you can buy one put option at the strike price you choose to have a guaranteed right to sell the stock at that price, no matter what. For example, when i buy 100 shares of XLE and at $60 also buy the put at $60 for 1 year. I have the right to sell 100 shares of XLE at 60 no matter what, even if the stock goes 10 bucks.
Just like house insurance, the more premium you paid, the more coverage you have. You can decide to cover your stock at 60 and pay more premium, or if you have the stomach to take more loss, insure it at $55 for cheaper. And don’t forget to renew them every year!
Put Option works exactly like house insurance, there is no difference. It is very easy to understand as you can see. Yet online brokers make option seems like such a risky thing to trade, and some will make you go through pain to get the right to trade option. That is just plain BS. Option should be easy to access and available in every single trading account as a default, including 401k. Imaging somebody tried to hide you from a fact that you could buy insurance for your house. That is just horrible.
Make no mistake, Real estate is still better vehicle to invest in term of tax advantage, long term wealth, appreciation, depreciation, etc…But i think it would be nice to spot the opportunity and score some cash here and there to reinvest it back into real estate.
Disclaimer: I do not recomend you to do anything. Do your own research and seek professional opinion. the article above is for educational purpose only