Have you ever purchased insurance for your car or home? Or leased a car? If you have, then you are already using trading strategies that we teach our lifetime members to protect their portfolio from a decline in prices or take advantage of an increase in the market prices. When you buy insurance, you are paying a premium for a specific period of time that provides you protection of an asset (such as a car or home), that should something happen, you have coverage to replace your asset. How much premium you pay depends on the replacement value you choose and the amount of time that the coverage is good for. Since you are already using this strategy to protect your home or your car, why not also use it to protect your investment portfolio? We use this strategy to protect us against a decline in the market while continuing to take advantage of all upside gains. Most of us wouldn’t think of owning a car or home without insurance to protect it, so why do so many leave their investment portfolio’s unprotected? And how does leasing a car apply to trading and investing? When you lease a car, you are paying a premium (usually referred to as payments) that gives you the right to use that car for a specified period of time. At the end of the term, you have the option to purchase the car at a defined value. We can use the same type of strategy to take advantage of a potential increase in a stocks value. Using a call option, we pay a premium that gives us the right to take advantage of any increase of value in the stock for the specified period of time defined by the contract. At the end of the term, we also have the option to buy the stock at a predetermined price, exactly like what we do when we lease a car. This allows us to use a smaller amount of capital, limiting our risk, while enjoying the upside gains when a stock increases in value.
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