Your Options- Your Future
Friday, December 18th, 2009The secret coded vernacular, the private, guarded language of Wall Street and Chicago are being de-coded on an accelerated basis. The financial services industries pride themselves on their “special, clubby knowledge” about investment instruments which appear mysterious and highly selective. The insurance industry is an even worse offender.The exciting news then is that once the wrappers of mystique are peeled away and the intentional mumbo jumbo is exposed, the underlying technique, the actual device itself is a beautiful thing to behold. Options and futures are bets used to mitigate/manage/reduce investment risks while enhancing total returns on a systematic basis.Now, please; whatever you do; read on. This is meaningful, easy to grasp stuff; we promise! The days of “buy and hold” for conservative investors are long gone. Of course with guilt-edged blue-chip stocks losing 30% or more of their value, the common man’s interest in hedging his bet, or more accurately his loss, is understandable. This market recession is different the experts tell us, unlike the 1987 crash or the bear of 1989 where bull stampedes came quickly on the heels of disaster; these cuts went deep and lasting back then, along with 20%+ setbacks, so many folks swore they would never “go long unprotected” again.These same folks had awfully short memories in that rapid up-ticks just months later sucked them back with no protection whatsoever; no insurance hedge for dips or bigger disasters. Options, for example are great for their protective qualities and they will generate good income even within prudent, traditional strategies.Remember that an option is simply the right (not obligation) to buy or sell “something” (a stock for instance); 1. at a certain price, and 2. at a specified period of time. Jim Bittman, senior instructor at the Options Institute (the educational division of CBOE) loves to explain put options as a homeowners insurance policy. “…the house burns down; the homeowner gets back the full price of the house, minus the deductable. Likewise, say the stock you like (currently own) is priced at $100.If you buy a put option at $90 strike price, and that stock goes down to zero, you get the strike price back; limiting you loss to only $10. Mr. Bittman also effectively uses auto leases as another good example, this time for a call option (a put is an option to sell and call is an option to buy, either can be bought or sold), where by the lessee can buy out the lease/exercise his/her OPTION for specified price at a specified period of time.Futures are an even easier concept to grasp. When a homeowner purchases heating oil for example in spring for the upcoming winter months, he is simply locking in a fixed price ahead of the winter season; unknowing as to the price swings.Take a look at commodities, precious metals, gold for instance, even stock indexes, currencies and treasury bonds. Not only can you make a bet on a certain item going up or down in price in the FUTURE, you can also efficiently hedge or amplify an existing investment position, even an entire portfolio by employing futures contracts and the leverage of 10:1 is unbeatableYour Credit Company