Insuring Investments

Investors often have insurance for their house, car, life and business, but many dont have insurance for their stock investments and that is a real shame. One way to insure stock investments is by purchasing put option s. An investor can insure an individual stock or a portfolio of stocks using put option s. In the blog article, Individual Insurance or Group Insurance Better ? , we examined the relative costs and trade-offs for insuring each individual stock versus insuring a portfolio of stocks using index put option s. The basic gist of the article is that it costs less to insure a diversified portfolio of stocks with index put option s than it costs to insure each position individually.

Insurance With VIX Options

VIX & European Style Options

The options for the VIX are European style options, which means they can only be exercised on the options expiration date and cant be exercised early as in the case of American style options. The VIX is also a mean reverting index with the average value of the VIX around 19. So if the value of the VIX is greater than 19, then there is a greater chance of it falling than continuing to rise, and vice-versa. The combination of European style options and the mean reversion nature of the VIX results in option prices having values which are counter intuitive for the VIX. For example, on May 7, 2010 the value of the VIX closed at $40.95 and the value of the May call option with a strike of $30 was at a price around $6. For a normal in-the-money call option (not mean reverting like the VIX), the intrinsic value of the call option would be the difference between the underlying and the call option strike price, which in this case would be $10.95 ($40.95-$30). So the price of the May call option with strike of $30 should have been at least $10.95 based on the conventional wisdom for option pricing, much higher than the actual price of $6. The VIX options can still be bought and sold, but the price received may be significantly different from what is normally expected. Incidentally, the price of the VIX settled at 34.53 for May 2010 and the price of the VIX May 30 call option would have received $4.53 after exercise, not too far from the $6 price on May 7, 2010.

Safety Net

Based on our study, we have decided to introduce the PowerOptionsApplied Safety Net . Each month we will publish a VIX call option trade in order for our customers to insure their portfolios. The Safety Net will be made available for all of PowerOptionsApplied s TradeFolios TM for trading and will be especially useful for customers investing in Titaniums covered call trades. Even customers trading Iron Condors or Double Diagonals should find the Safety Net useful, as it may help offset a loss when the market decides to take a tumble. Theres no additional charge for the Safety Net, as it is included as an add-on for all of PowerOptionsApplied s TradeFolios. Customers may also find the Safety Net useful for insuring a portfolio of long positions in stocks. In general, customers could use 0.5% of their portfolio every month as insurance. A portfolio of $100,000 could be insured for $500 per month. Unlike auto and home insurance, the VIX call insurance provided by the Safety Net can actually return a profit over the cost of the insurance. The Safety Net is more similar to life insurance, except the person gets to enjoy the benefits of an insurance distribution instead of the beneficiaries.

Autotrade the Safety Net

Any customer of PowerOptionsApplied may opt to have the Safety Net automatically traded in their accounts using autotrade with select brokers. For example, a customer desiring to insure a portfolio of $100,000 using 0.5% of the portfolio per month could opt to enter $500 as the Trade Amount with the trading parameter set to Specific Dollar Amount (calculated as $100,000*0.5%). Every month we will post a new trade to the Safety Net and the broker will purchase VIX call option s for the account. For the $100,000 account example using 0.5% per month, the broker would purchase up to $500 of VIX calls each month as portfolio insurance for the account.

PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy .