As an investor, there are few things worse than seeing an otherwise fundamentally sound stock drop precipitously on the back of news that is totally unexpected or only tangentially related to the given company — such as the European debt crisis. However, there is some reprieve for investors from this frustration; by employing a protective put, you can obviate large downside risk of black swan events.
After the ECB disappointed markets with no immediate action gold prices moved sharply down — as low as $1,590, bouncing off the downward trend line. This is below the psychological level of $1,600.
With all the central bank speculation, our scans found an interesting trade in one of our favorite names within the options market, costing over half a million dollars and controlling half a million in shares.
After the ECB indicated there could be “merit” in providing the euro zone’s bailout fund with a banking license, and a growing number of FOMC committee members indicated additional stimulus may be needed to spur U.S. job growth, speculation ramped up as the euro pushed higher against the U.S. dollar.
For investors keen on mitigating risk when trading options, you need to understand the fundamentals of a bull call spread.
I am always looking for an overall strategy that will provide returns with a minimal amount of risk. We covered one investment strategy, core-satellite, last week that separates a portfolio into passive and active components. This week we examine a strategy I have used regularly depending on market and company-specific views: using cash secured puts.
Like the deep-in-the-money options we covered last week, employing a covered call strategy can be lucrative for both sophisticated and beginning investors alike. However, before jumping into this type of trade, you must understand the potential benefits and pitfalls of the covered call.
Euro zone markets remain under pressure with the EURO STOXX 50 dropping 2.57%, the French CAC 40 falling to 2.24%, and the euro zone’s strongest component falling hard with the Germany’s DAX 30 falling off a cliff by 2.09%.