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It's Nice to have some Market Insurance

February 28th, 2007 at 12:48 am

Well, a correction was well-overdue, so a one-day drop of around 3% in the stock market was no great surprise, although the alleged "trigger" for the event (the Chinese market taking a hit) was a surprise, as is normally the case. On the up-side it makes the $5K I spent on buying 3 Index Put Option contracts on 9 Feb look more like sensible insurance, rather than simply throwing money down the drain.

I'd need to be holding 12 5500 ASX Put contracts to fully cover any losses to my stock portfolio due a bear market (or severe correction), so I'm not fully insured yet. I was hoping to pick up some additional ASX 5500 Dec Put Options as the market continued it's bull run - on Friday the Australian market had closed over 6000 for the first time and the cost of the Put Options had dropped as low as $0.98 at one stage (I had bought the previous 3 contracts for $1.58 on 9 Feb). Although I thought about buying some more Put options last Friday, in the end I didn't bother. (If I had I'd be thinking how great I was at market timing! Wink

Unfortunately the price for the options probably won't be as attractive even when/if the market recovers back to the 6000 level as the increased volatility will make the options more expensive.

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