21st Century Academy

Protect Your Capital At All Times

In today’s post we will have a look at putting your money in to the Stock market and ensuring that you protect your capital. There is just one strategy that I will touch on today, and it involves the use of Options.

The great majority of my clients are share trading because they want to produce a monthly income to substitute or replace their income. They have been doing this through a great Stock market Strategy called Renting Shares, or Writing Covered Calls. Up until early this year, that very simple strategy has worked great and made a consistent and lucrative income for many people.

Due to the changing market conditions though, we now have to also take into effect that markets do go down, and do go down a lot. What if there was a similar income producing strategy that also allowed you to insure yourself at a price that will still see you making a very handsome profit?

So why don’t we continue Renting out your Shares, and then insure your shares at a couple of dollars under what you paid for them. To purchase insurance or a Put Option at this price will only cost you a small fraction of the profit that you are receiving from writing your Covered Call.

So let’s look at an example here. We purchase 1000 Shares of company XYZ at $10 each, $10,000 all up. Then we would rent them out or write a Covered Call somewhere not to far out of the money, so maybe at $11. For this we will receive a premium of 45c, which equates to $450. Now what we would do is purchase your insurance, or buy a Put Option some where deep out of the money, at maybe $7. We will need one Put Option, and this may cost .08c, or $80 per contract (if working in contracts of 1000 shares).

That will leave us with a net premium of .37c or $370 per contract. We know the stock can do one of three things. If it goes up above the Strike Price we can get exercised and we great a capital gain on top of our premium. If the share price stays around the same price then we still have our premium and we can rent the shares out again the next month.

If the shares tank though, and head due south pretty quickly, you have complete protection at the price that you insured them for, and in this case you can sell your shares if you so wish, at $7. The maximum you can donate back to the market is $3 per share, less your initial premium of 0.37c so that means your real loss can only be $2.63 per share.

This is just one great Stock Market Strategy that is being taught at The 21st Century Academy right now, and all Homestudy members get access to this and many more like it.

Written by Clint Maher - 21st Century Academy
Complete Wealth Education P/L © 2008