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Seven ‘virus killers’ for your portfolio

Written by Peter Siks | 8 minutes
THU 05-03-2020

After the stock prices initially continued to rise, the financial markets have fallen under the spell of the coronavirus in recent days. On Monday there was even a decrease of 3.9 percent in the Dutch AEX, the largest daily loss since June 2016.

How to handle this? Of course this depends entirely on your vision. If you think it is temporary and heavily exaggerated, you don't have to move. If you think it can fall much further, it is important to take action. In this article you will find a number of options.     

It goes without saying that you only apply the options below if you are confident that the share will increase (in the long term). If you are convinced that the stock is going to fall and will be lower in the coming years, then you have to sell ruthlessly. In addition, these strategies are only suitable for advanced investors who know how options work.

 

POSSIBILITY 1 - EXCHANGE SHARES FOR LONG-TERM CALLS.

What is the advantage of this strategy? You know that you have to pay a premium when buying a call. But this is also your maximum loss at the same time! If you buy a share at € 15, you can lose € 15. You can also choose to buy a call with a long term that is just in the money. This costs, for example, € 3.50, which is your maximum loss. If the share drops from € 15 to € 7,50 and you own the shares, you will lose € 7,50. The call will of course also decrease in value and maybe it is only worth € 0.50. You make a loss, but this is much less than the € 7,50 you would have lost in the share.

 

POSSIBILITY 2 - CHECK YOUR PORTFOLIO

Take a look at your portfolio and forget the original purchase price. In principle, you start again every day when investing. Take a look at your portfolio with new eyes. If you had the value of your current portfolio in cash and you were going to invest, would your portfolio look exactly like this? If you are completely satisfied that it would, do not change anything. If you are not completely satisfied and especially afraid about missing out, take a look at possibility 3.

 

POSSIBILITY 3 - SELL A PART OF YOUR SHARES AND WRITE PUTS

Suppose you own 1,000 shares that are now worth € 20. You have faith in the company, but at the same time you see that the share decreases if the entire market falls. What you can now consider is to sell half of the shares and at the same time write 5 puts just below the current price. If the share goes up, you earn from the 500 shares and the written put will be worthless. So if it goes up you do well. However, should the share fall, you will be required to purchase the shares by writing the put. But at a lower level than what you sold them for. You have, as it were, skipped part of the decline.

 

POSSIBILITY 4 - WRITE CALLS ON EXISTING SHAREHOLDING PROPERTY

If you write a call, you sign up for an obligation to deliver. For a lot of investors this feels unpleasant because they obstruct the upside potential. The question is whether this is really the case. Suppose the share quotes € 10 and the call with exercise price 11 yields € 1. If you write this call you have built up a buffer of € 1 for a decrease. That is not sufficient if the share is halved, but it is better than nothing. But if the share goes up, you can roll the written call to a higher strike price. You only do this if you expect the share to rise further. You can continue to roll if the written call is At the Money. You then choose a higher exercise price and a slightly longer term so that you can continue rolling with a small credit. The essence of this strategy is that you constantly write a pure option premium as long as you see upside potential.

POSSIBILITY 5 - PROTECT YOUR SHAREHOLDING WITH PUTS

Fortunately, many investors know the effect of puts. At the same time, a lot of investors find it too expensive. My mother used to say, "Better expensive than not for sale," and I think a lot of investors would have made a lot less loss if they had bought puts among their shares. The disadvantage of this possibility at the moment is that the wells are expensive. Due to the high mobility, the put premium is currently high. A variant is the purchase of a putspread. Less investment but a maximum value that is maximised to the strike price difference.

 

POSSIBILITY 6 WRITE CALLS AND PUTS

This is actually a combination of option 3 and option 4. Suppose you own 1,000 shares. What you can do is sell 500 shares, immediately write 5 puts and five calls. You now make optimum use of the high option premiums that you receive. And if the share falls then you are required to purchase 500 shares at a significantly lower level than at which you sold them. And if the share starts to rise, you can continue rolling the written call as discussed in option 4. You can also write the put again.

 

FINALLY; STICK TO YOUR SIZE (DEFINITELY WHEN WRITING PUTS!)

If you have a strategy which involves writing puts, make sure that you remain aware of what putting writing involves. Too often investors only look at the margin requirement that option writing entails. They forget to look at their potential exposure (position in the market) that they are actually running. If the share is € 50 and an investor writes 10 times the put 50, then he will create a potential exposure of € 50,000 (minus option premium received). This while the margin "only" is € 4,500. This can lead to investors writing too much. Nothing wrong if the share remains stable or rises. But in a stock market that is going down, this can cause a lot of misery. So stick to your size, especially if you write puts.

 

In short, even if you are at a loss, there are indeed repair options. But before you apply any of the above strategies, make sure you understand them completely! Success on the stock market.

Author

Peter Siks

With more than 30 years of experience, Peter Siks has now been tried and tested in investing. Among other things, Peter is interested in the psychological aspects of investing and since 2010 he has been working at BinckBank as an investor trainer.

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