Fear The Drop! As coaches, we are always asked about avoiding The Drop in the stock market. We believe that attempting to time the market is impossible, similar to other experts like Warren Buffett. However, the key to preserving your capital corresponds with your ability and knowledge to hedge the risk in your portfolio.
One of the most famous stories involves Mark Cuban and how he preserved the value of his portfolio. In 1995, Mark Cuban sold his company to Yahoo and received 14.6 million shares of Yahoo stock, with the restriction that he couldn’t sell his stock for 3 years. In order to preserve the value of his portfolio over that time, Cuban used options, specifically protective puts to limit his downside risk and covered calls to pay for these “insurance” options. Good thing because the dotcom bubble hit all tech stocks hard.
While options can provide tremendous leverage, they can also get you into trouble if you don’t know what you are doing. The key is to use education and coaching to reduce your risk. With the right strategy and coaching, options can help you secure your portfolio and help you reduce The Drop.