I
have spoken to many people recently, who were forced to look
at their portfolios for tax purposes. They have become downright
depressed. I say forced to look at their portfolio because
they were literally afraid to open their broker statements
because they didn't want to face their losses. After discussing
these issues and seeing the despair, I know more than ever
that people need more information on money management. Therefore,
this is the first article in a series on money management
using options investment strategies.
In this series I'll discuss how you can limit your financial
risk. Limiting financial risk will require you to take responsibility
for your own account and become more proactive before the
losses, rather than reactive after the losses. If you choose
not to be active with your own money and wish to continue
leaving every thing up to your broker, save yourself some
time and skip reading this series.
There are a number of ways to manage
your money and prevent large losses. Most people watch
their stock go down. While
convincing themselves that the stock price will recover.
Well… it may and it may not, not for a while anyway.
It could be dead money for quite some time while you could
be making your money work for you in other stocks. A lot
of people (women) that I speak with about investing seem
to think that because they have some money in the stock market
they are o.k. They don't focus on whether it is making them
money or losing them money.
Well I've got news for you. The purpose for investing is
to make money and to make as much money as you can in a given
time. If you are not making money or if you are losing money,
you may be sitting on dead money that is not doing you any
good. So perhaps the first thing many investors need to do
to make money is to change their attitude about money, investing
and managing money.
One way to manage your money is to prevent big losses by
setting a predetermined sell price if the stock begins to
decline in value.
Let's use IBM as an example. You bought
300 shares of IBM on October 3, 2001 for around $95.00.
IBM rose to around
$125 on January 8, 2002. You looked at your stock and saw
that it was really rising but you began to feel that it might
correct at some point. Just a small correction you thought.
So IBM went to $117 on January 14. You say to yourself, "It's
IBM, It'll go back up." January 22 it has dropped to
$110. "Not to worry you think, it's IBM." By February
it is $98 and on and on. You have not lost any money at this
time because you bought for $95.00 so not to worry right?
Wrong! Remember we want to make money so there is need to
be concerned.
Four things you could have done before IBM declined to 98:
Have a lost cut of whatever you are willing to lose. I may
not want to lose over 20% of my profit. So if IBM gets to
$105 (or whatever 20% of 125 is) I sell. That simple. If
for whatever reasons, i.e. taxes, etc, I do not want to sell.
I could sell a call against the stock. If I think IBM may
correct over a period of the next 4 months, I could sell
a Jan 2003 140 call and collect the premiums.
I could buy a put. If the month that I'm in is January, I
might buy a June 120 put. This way only $5.00 would be
a loss. If IBM should move to 90 (which it did) before
June, the money I'd make on the long put would offset my
loss below 120.
I could sell a call and buy a put. The money I take in from
the call could pay for the put.
The above are a few of the strategies that can be used to
prevent heavy losses in your portfolio. Some of them can
even be applied in your IRA account. BUT DO NOT DO THIS
UNLESS YOU KNOW WHAT YOU ARE DOING. I am only providing
you with what you can do and not how you should do it or
the pros and cons for doing them. They will be featured
in the upcoming articles.
Next week, I will discuss what you should do before you
buy a stock or option in order to prevent large losses and
how to determine when you should sell.
Previous Options Articles:
Options Start
Options Article 1
Options Article 2
Options Article 3
Options Article
4
Options Article 5
Options Article 6
Jenyce Johnson
Options Strategist, Trader and Coach
Not a licensed professional
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