Basics of Options -6

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How to insure a stock ?

Have you ever observed, we all do insurance to important things in life. Be it health, life, general insurance for home, car etc. But do we insure our investments? Is it not important? Or We may sure that our investments move only "North" direction? Right.
There is always a probability for "South" direction also.
Any how most of us not doing Insurance to our stock. This is true.

But only financially literate people buy this insurance for stocks in their portfolio. So, whenever their stocks lose value due to market fluctuations, they claim from insurance sellers. Literally, their portfolio are always insured against black swan events or general downtrend in financial markets.

How to do that? What are costs involved?

Very simple, buying a put option will resolve the problem. The cost is premium we have paid to buy a PUT Option.

At what strike price the stock should be insured?

It depends on the nature of person doing insurance to his stock. If he/she is not comfortable even a small downward movement, the he/she would go for the strike that matches with the cost price of stock. It involves more premium.
If the investor is comfortable a drawdown of up to 10%, them he/she may choose a lower strike put option. In this case insurance cost will drastically reduced.

Will this regular insurance costs eat all our capital appreciation / dividends in due course of time?

Not abosulte false.. But as this name of this blog  suggests Optionsi3-Insure Invest Income. There is a way to reduce/elimanate this insurance costs by getting regular income from the same Options World.

Today I have discussed the importance of insurance to stocks in portfolio. How to do that & Costs involved.

Tomorrow I will explain how to get this/compensate  insurance cost (majority portion) from options.

Happy Learning,
Sandeep Tummuti.




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