lystn

Hey everyone, Kirk here again and welcome back to the daily call. Today's call focuses on how we can use option strategies to protect gains. This is mostly for stock investors. I think that this is important just as we wrap up February here because February was such a volatile month. We had so much volatility particularly in the beginning of the month with stocks falling really, really hard. People are now asking and we’re getting questions and we see it all over the place. “How do we protect ourselves from gains? If we had a stock portfolio, how could we have protected some of the gains that we had?” There’s a couple of ways you can do it. We’ll cover three general strategies. There’s obviously a lot more that we can cover in other podcast, but I’ll take the top three or not top three, but the ones that are most often talked about. The first way that you could’ve protected gains is with a long put option. If you’re long stock and we’ll assume for the rest of the podcast here that you're long stock. If you’re long stock, one of the ways that you can protect your gains is with a long put option. Now, in the case of the markets heading into this recent selloff that it had, if you had a long put option because volatility was so, so low, it probably didn’t cost you a lot of money, meaning the insurance on that option was probably actually really low. The volatility premium was pretty low, so it probably didn’t cost you a lot of money. The trouble with put options is that if you have to maintain that insurance, meaning you buy that put option month after month or quarter after quarter, it does become costly and it does start to eat into your potential profits to the point at which it doesn't really make sense to do it unless you know (which who really knows when the markets going to selloff) that a selloff is coming. The second way to do it is to do a short call option or a covered call. This is historically been much better than doing the long put option strategy because when you are in situations where you don’t know if the markets going to selloff or not, executing a consistent and rhythmic covered call strategy to reduce cost basis is a great way to go about it. Now, it’s not going to protect you and totally hedge you from the markets going down like we recently saw, but it does reduce the cost of ownership. Again, if you’re long stock at $100 and you can sell a covered call for say $1, it reduces your cost ownership down to $99. You do that consistently month in, month out, you can start to cut some of the premium out of your cost basis and the shares, so that at the end of the year, say you've collected $12 in premium, now, if the market goes down 10%, you’re still okay. You still actually are making money because of that covered call that you’ve been consistently selling on that stock. Again, it’s a different way of going about it. It doesn't protect you totally from the downside like maybe a long put option would, but it’s a better income driven approach when you don't know that the markets are going to fall. The third way to do it and probably a better way to do it generally is to do what’s called a “caller strategy.” In a caller, you basically combine both of these strategies and you try to do it for no cost. No cost out of your account and what it does is it offers a little bit of protection from the stock going down, but it doesn't offer complete protection. You basically are going to execute a caller strategy which is selling one call, buying another put option down below, using the cost of them to offset one another and do it for no cost and what this does is it allows you to basically get free insurance. In exchange for it not costing anything, it doesn't offer as much protection as say a long put option would. But I think this is probably the better way to go about it especially if you don't want to do the covered call for some reason and you want to do the costless caller. It’s probably a very easy strategy to start executing because it doesn't cost you anything and you always have a little bit of built in hedge for your positions. A very, very easy thing to do and again, you can learn more about the costless caller on our weekly podcast. Just search on optionalpha.com and we have a whole tutorial and training on that as well that you can check out. Hopefully this helps out. Until next time, happy trading!