Punting with Puts
Alan Greenspan once said the markets were experiencing irrational exuberance. Is that time here again?
There are some tell tale signs that the financial markets are getting a bit frothy. When everyone is talking about making money in stocks is one of them.
When even shoeshine boys are giving you stock tips, it’s time to sell
Joseph P. Kennedy
I don't know if shoeshine boys exist anymore but the principle of mass participation and rampant speculation being a warning is still valid.
There have been a few such warnings in recent weeks. I've had those who have previously never been involved in the stock market calling me with some tips. I am always grateful for the suggestions of course but the time to enter the markets for the first time isn't when you are in your late 50's!
So consider this a cautionary warning. I don't see a collapse in stocks but it could be that a correction is imminent.
Here's the test. As at writing the Dow Jones is around 31,500 points. The NASDAQ is around 13,700 points and the ASX200 index is around 6850.
I'll be taking out some insurance by buying some April put options to see if I can capture some gains if the market does fall before then.
The risk is that I could lose whatever I spend on the puts but like all forms of insurance, sometimes it is better safe than sorry.
What is a Put Option? (from Investopedia)
A put option is a contract giving the owner the right, but not the obligation, to sell–a specified amount of an underlying security at a pre-determined price within a specified time frame.
Put options are traded on various underlying assets, including stocks, currencies, bonds, commodities, futures, and indexes.
Put options increase in value as the underlying asset falls in price, as volatility of the underlying asset price increases, and as interest rates decline. They lose value as the underlying asset increases in price, as volatility of the underlying asset price decreases, as interest rates rise, and as the time to expiration nears.
Put options they are typically used for hedging purposes or to speculate on downside price action.
Investors often use put options in a risk-management strategy. This strategy is used as a form of investment insurance; this strategy is used to ensure that losses in the underlying asset do not exceed a certain amount.