When you consider that any shares you own is like property you begin to see the importance of insuring your shares, it just makes sense, doesn’t it? When you insure your shares, you are protecting your capital against loss.
Insuring shares is different from other types of insurance you are familiar with because you are not necessarily buying a policy, you are purchasing a promise. The insuring shares policy is called a Put Option. Simple, right? The promise you buy when insuring shares is that you will be able to sell the stock at a certain price no matter what is happening in the stock market that may cause the shares to drop in value.
I know you want to know how this works so here is an example. You buy insurance for your shares of $20 per share. This means that you are guaranteed sell price of $20 per share even if the value of the share drops to $3 per share. Need some more detail? No problem, here we go.
Example 1: You own shares of the XYZ corporation and the shares were purchased at $17.00 but are trading at $20. When the shares are trading at $20 you decide on insuring the shares at $17.00, the price they were purchased for and you want the insurance for one year. This insurance may cost you 20 cents per share.
Example 2: The price of insuring the shares is going to depend on the length of the policy and the per share insurance price. Therefore if you want to insure the shares for $20, a higher per share price than what you purchased them at, with one year of insurance, your premium price is going to go up, maybe even double or more at let’s say 65 cents. With this insurance in place we would be guaranteed a selling price of no less than $20 per share. This means that even if the corporation falls apart and their shares tank, you will still be able to sell at no less than $20.
Funding Share Insurance
You may be happy to hear you can insure your shares, but at the same time are probably wondering how you can pay for the insurance. One strategy you can use to pay for insuring shares is through renting your shares. Then you can use the premiums you receive from the share rental to pay for the share insurance.
Simply stated, a covered call is a strategy to make short term profit on stocks you intend to hold long-term. You are basically giving another buy the rights to when and how much you sell the stock.
When a share renting strategy is part of your investment plan, you will be able to generate income with the premiums you receive from the purchaser of your rent. With this income you can begin insuring shares in your portfolio.
0 comments:
Post a Comment