Buy Protection with Puts

By | August 24, 2015

In my previous post, Protect Your Principal Investment, I talked about protecting your portfolio. I did not follow this advice in the past and had lost a fortune. I decided to heed the advice going forward and bought protect for my oil holding, Chevron Corporation(NYSE:CVX) in my DGI Portfolio. I bought a PUT at a strike price of 85 and expiration of Dec 2015 against my holding. This PUT allows me to sell my CVX holdings at $85 regardless of how low the stock drops. In exchange I pay a premium of $5 for the PUT. Essentially I have now defined my max losses for my CVX shares to be at $80.

The reason why I bought a PUT instead of selling the shares is because I’d still like to collect the dividends and hope to see a rebound in the share price in the near future.

The CVX PUT came in at a great time this week, because oil slid to record low prices. Also, on Friday August 21, 2015, the stock market had a huge drop, with the DOW down more than 530 points. That is the biggest single day drop since 2011.

The market is highly volatile now and these swings are likely going to happen again. I will have to consider more protection for my portfolio if I want to survive this storm.

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