Online Trading Academy Article of the Week
by Russ Allen, Online Trading Academy Instructor
With u.s. equity markets at all-time highs, many people are thinking about how to protect profits on a stock, or a portfolio, against the inevitable day when the next bear market begins. I have discussed various ways to do this using options, in the articles that you can read here and here. Today's article will wrap up this subject for now. Several of the methods we explored earlier involved continuing to hold the stocks. The one we'll look at today involves selling the stocks, and replacing them with a combination of interest-bearing deposits and call options.
Let's say we have a portfolio of stocks worth one million dollars, and we are concerned that the market could drop substantially from here. Despite our concern, we also know that the market could continue to rise, and so we are reluctant to sell out and then be left behind completely.
I've left this method for last, because the current environment is not the most favorable one for it. I'll explain why below.
In its simplest form here's what it would involve:
