Forum Archive Index - January 2004

["Woody" <solarmax@optusnet.com.au>]

Most of you probabily don't know that you can insure your shares. The average person holds a share for 12 to 18 months.

Say for instance you buy 1000 NAB Shares say for $28.00 that is $28,000 if NAB goes down another $5.00 you lose $5,000

if it goes back up you can recover you investment. However if it stays down for months or even years the investment is beginning to look like a losing trade. BUT! if at the same time you bought your shares you bought an at the money PUT with 18Months of time value your shares are insured for 18 months @ $28.00 per share. If during the 18 months NAB goes down to $23.00 per share you will still get $28.00 per share.

 

Cost of the shares $28,000 ( commissions are not calculated here )

Cost of Put           $  2,000

Total Cost             $30,000

The share needs to rally to $30.00 per share to break even with your PUT

 

However if NAB rallies to say $35.00  you can sell your shares for a $5,000 Profit but you still own a PUT.

So if after you sell and if within the 18 Months you can still gain value on your PUT if NAB declines again.

 

Woody