Best of the Week
Most Popular
1.Are UK Savings Interest Rates Finally Starting to Rise? Best Cash ISA 2017 - Nadeem_Walayat
2.Inflation Tsunami - Supermarkets, Retail Sector Crisis 2017, EU Suicide and Burning Stocks - Nadeem_Walayat
3.Big Moves in the World Stock Markets - Big Bases - Rambus_Chartology
4.The Next Financial Implosion Is Not Going To Be About The Banks! - Gordon_T_Long
5.Why EU BrExit Single Market Access Hard line is European Union Committing Suicide - Nadeem_Walayat
6.Trump Ramps Up US Military Debt Spending In Preparations for China War - Nadeem_Walayat
7.Watch What Happens When Silver Price Hits $26...  - MoneyMetals
8.Stock Market Fake Risk, Fake Return? Market Crash? - 2nd Mar 17 - Axel_Merk
9.Global Inflation Surges, Central Banks Losing Control and Triggered the Wage Price Spiral? - Nadeem_Walayat
10.Why Gold Will Boom In 2017 - James Burgess
Last 7 days
Silver Mining Stock Fundamentals - 24th Mar 17
A Walk Down the Dark Road of Bad Government - 24th Mar 17
Is Stock Market Flash Crash Postponed Until Monday? - 24th Mar 17
Stock Market Bubble and Gold - 24th Mar 17
Maps Of Past Empires That Can Tell Us About The Future - 24th Mar 17
SNP Independent Scotland's Destiny With Economic Catastrophe, the English Subsidy - IndyRef2 - 24th Mar 17
Stock Market VIX Cycles Set To Explode March/April 2017 – Part II - 23rd Mar 17
Is Now a Good Time to Invest in the US Housing Market? - 23rd Mar 17
The Stock Market Is a Present-Day Version of Pavlov’s Dog - 23rd Mar 17
US Budget - There’s Almost Nothing Left To Cut - 23rd Mar 17
Stock Market Upward Reversal Or Just Quick Rebound Before Another Leg Down? - 23rd Mar 17
Trends to Look Out For as a Modern-day Landlord - 23rd Mar 17
Here’s Why Interstate Health Insurance Won’t Fix Obamacare / Trumpcare - 23rd Mar 17
China’s Biggest Limitations Determine the Future of East Asia - 23rd Mar 17
This is About So Much More Than Trump and Brexit - 23rd Mar 17
Trump Stock Market Rally Over? 20% Bear Drop By Mid Summer? - 22nd Mar 17
Trump Added $3 Trillion in Wealth to Stock Market Participants - 22nd Mar 17
What's Next for the US Dollar, Gold and Stocks? - 22nd Mar 17
MSM Bond Market Full Nonsense Mode as ‘Trump Trades’ Unwind on Schedule - 22nd Mar 17
Peak Gold – Biggest Gold Story Not Being Reported - 22nd Mar 17
Return of Sovereign France, Europe’s Changing Landscape - 22nd Mar 17
Trump Stocks Bull Market Rolling Over? You Were Warned! - 22nd Mar 17
Stock Market Charts That Scream “This Is It” - Here’s What to Do - 22nd Mar 17
Raising the Minimum Wage Is a Jobs Killing Move - 22nd Mar 17
Potential Bottoming Patterns in Gold and Silver Precious Metals Stocks Complex... - 22nd Mar 17
UK Stagflation, Soaring Inflation CPI 2.3%, RPI 3.2%, Real 4.4% - 21st Mar 17
The Demise of the Gold and Silver Bull Run is Greatly Exaggerated - 21st Mar 17
USD Decline Continues, Pull SPX Down as well? - 21st Mar 17
Trump Watershed Budget - 21st Mar 17
How do Client Acquisition Offers Affect Businesses? - 21st Mar 17
Physical Metals Demand Plus Manipulation Suits Will Break Paper Market - 20th Mar 17
Stock Market Uncertainty Following Interest Rate Increase - Will Uptrend Continue? - 20th Mar 17
Precious Metals : Who’s in Charge ? - 20th Mar 17
Stock Market Correction Continues - 20th Mar 17
Why The Status Quo Is Under Increasing Attack By 'Populist People Power' - 20th Mar 17
Why the SNP WILL Destroy Scotland, Exit UK Single Market for EU - IndyRef2 - 19th Mar 17
Crypto Craziness: Bitcoin Plunges on Fork Concerns, Steem Skyrockets and Dash Surges Above $100 - 19th Mar 17
What ‘Ice-Nine’ Means for Your Money - 19th Mar 17
Stock Market 4 Year Cycle - 18th Mar 17
The Only Article You Need to Read to Understand the Trump Phenomenon - 17th Mar 17
Janet Yellen Just Popped the Stock Market Bubble - 17th Mar 17
Financial Crisis, Steve Eisman: Smart, Lucky, Abrasive & Now One Of Them - 17th Mar 17
Gold Cup – Horse Racing’s Greatest Show, Gambling and ‘Going for Gold’ - 17th Mar 17
Trader Education Week - Free Event to Help You Learn to Spot Trading Opportunities - 17th Mar 17
$1.4 Trillion of SPX Notionals Due to Expire - 17th Mar 17
Preserving Order Amid Change in NAFTA, U.S. Sovereignty v. WTO - 17th Mar 17
3 Maps That Explain Why Syria Raqqa Battle Will Drag On - 17th Mar 17

Market Oracle FREE Newsletter

Elliott Wave Trading

How to Protect Your Stock Market Portfolio Profits From a Crash

Portfolio / Financial Crash May 30, 2013 - 06:28 PM GMT

By: Money_Morning

Portfolio

Tim Melvin writes: Thanks to billions of dollars in quantitative easing from the U.S. Federal Reserve, fears over a looming stock market crash have been put on hold lately.

The Standard & Poor's 500 Index is up 16% this year. The market's outstanding performance has shrugged off weak earnings reports, slowing growth in China, and continued weakness in Europe.


It seems that zero interest rates really do trump all. Even Warren Buffett is unsure how all this ends, telling shareholders at the Berkshire Hathaway (NYSE: BRK.A, BRK.B) annual meeting "it's really uncharted territory. It's a lot easier to buy things sometimes than it is to sell them."

And I recently heard legendary real estate investors who at a conference compared the market to a game of musical chairs where everyone keeps playing because the music - QE - is still going.

But they cautioned that investors who aren't careful will be quickly left without a seat.

That's why investors should take steps to protect their portfolio from a possible severe decline in prices. Whether it's a stock market crash or a more mild price pullback, you always want to make sure you're prepared.

How to Protect Your Profits from a Stock Market Crash

It's time to sit down and go through your holdings stock by stock and ask some key questions:

  • Is the reason you bought the stock still true?
  • Do you have stocks that have experienced strong gains and now sell at very high valuation based on earnings, sales, and asset value?
  • Has the company's business or financial position changed for the worse since you bought the shares?
  • Would you buy the stock again today at the current price?

This type of prudent pruning can help you accomplish two things that will help protect you against losses from a market crash or sell off.

First, getting rid of overvalued stocks and underperforming companies will reduce your overall exposure to the market. Increasing your cash holdings may lower your return in the short term, but cash does not decline in a sell off.

It also gives you dry powder in your arsenal that can be used to scoop up bargain issues after a steep decline.

If you want more protection than pruning provides, you can buy insurance against the decline; here's one way to do that...

Using put options on the S&P 500 Spyder Exchange Traded Fund (NYSE: SPY) gives you "stock market crash insurance." You can even pick your own deductible based on how much risk you feel you can endure.

If you are worried about a decline in the market of more than 10% or so, you can buy a put option at $150 on the SPY that expires in January 2014. Each contract will cost you about $378 or about 2% of face value. If the SPY falls below 150, the puts will rise in value protecting you against steep losses.

Each contract represents roughly $16,000 of market value right now so you will need seven contracts for every $100,000 of portfolio value for full protection. If you want a longer term insurance policy, you can buy the same option for about $676, or 4.5% of face value that expires next June.

If you prefer more protection, you can protect against a loss of greater than 5% by purchasing options with a strike price of $157. This will cost about $550 for each January contract.

Just like all insurance policies you buy, the more protection you want, the higher premiums you pay for coverage. If the stock market falls you will enjoy the offsetting gains in the put options to keep your portfolio value relatively steady.

Of course if it does not, you lose the premiums paid just as you do with auto or homeowners insurance.

For more ways to keep your portfolio protected from a stock market crash, check out what our Private Briefing investment service members have been using...

Reading You Can't Miss: Five Reasons the Dow's New Highs Are "Bull-o-ney" and What to Do About It

Source :http://moneymorning.com/2013/05/29/how-to-find-stock-market-crash-protection-for-your-portfolio/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife