I want to catch the big runs in the
but, I don’t want to lose big. Is that not the key to investing? Notice I didn’t say trading but
investing. Investors tend to be big
picture thinkers and look at longer time horizons. We all want to get the big hits like GOOG,
AAPL, BIDU, or PCLN. Don’t forget you
can also double your money with a F, NVDA, or ZION. But in real life we want to get GOOG at $500
and run it up to $800 like it’s trading today.
To catch AAPL today at $430 and watch it run back to $705. Maybe BIDU at $90 and have it run back to
$155 or PCLN at $719 and run to the $1000 level. Maybe I am dreaming but aren’t we all in the
market to hit it big and make our dreams become reality? Let’s go make some
money in a bullish market but…..
But what if we had bought AAPL at
$705 and it falls to $430. There is
significant risk in investing when the market is at all-time highs. With all the headline risk, talking heads mentioning
a pull back on TV, or the fact the U.S. debt and government risking our reserve
currency status. Don’t forget about
Italy now throwing Europe into a tailspin.
China might not be growing as expected and Japan still hasn’t grown in
decades. Yes I want big money but there
is also big risk in investing. You can’t
make big money if you lose your trading capital in a big hit.
So now that we know the problem how
do we fix it? Ever say, “I can’t seem to
catch a bottom on a stock to save my life”.
I never would have thought to see GOOG at $560 in July 2012 or AAPL at
$430 today. If I can admit that I can’t
predict the stock price I have to face some hard facts. Do I forget the dream or is there something I
can do to hedge my risk? After decades
of trading in the market I’ve decided to use my options. Some consider options a risky word in the
equity world. Those are the ones who
chose not to spend the time or money to educate themselves on how to hedge
their risk in the market using options.
I’ve chosen to use options as
insurance on stock. I’ve held AAPL and
GOOG on the way down. You can’t catch up
days in the market if you’re not invested in the stocks. I am ok holding to big names if I have the
right to sell the stock at the highs it used to trade at. The long put acts as insurance on stock. I buy the right to sell my AAPL stock at $700
and now I am able to make up some of the downward movement. Of course the market will wipsaw you around
as we become a more global marketplace but that’s why you hedge risk. Experience teaches you more about your risk
tolerance and when to take your insurance on and off your stocks.
The best part of making up some of the downward movement isn’t lowering
your cost basis although that helps. It
isn’t being able to sleep at night. It
isn’t even the fact you are in the market so you won’t ever miss the pre-market
run on one of these stocks. For me the
best part of hedging risk is the fact that these stocks will runs back up to
their highs and every penny made on the way down is profit on the way back
up. I will get a great run and maybe
many runs in stock ownership over my investing life. The reason why, I am in the equities and
don’t have to guess when a run will occur.
Here’s to big dreams in the market.