We are licensed Financial Advisors that can apply these strategies to your portfolio on your behalf. You can have us manage and grow your assets while you are learning how to generate trading profits in your virtual trading account. We offer these services through our sister company, Tactical Wealth Advisors.
In theory, every investment carries some risk of loss...
If your home were to burn down, your investment in your house would be worth very little. To offset the risk of loss on your assets, you purchase insurance where you pay a premium to obtain coverage for a period of time. Your premium may be more or less expensive depending on the size of your deductible. The larger the deductible, the less expensive your premiums will be. That is because you are assuming more risk with a larger out of pocket deductible.
Your portfolio also carries risk of loss. All assets in a well diversified portfolio of stocks, bonds, and mutual funds carries risk of loss and could theoretically go to zero. The odds of that happening are slim, but there is a risk that you could lose all of your assets in your portfolio. Options can be used as risk management tools to prevent loss in entire portfolios. We tactically execute strategies to reduce the risk in your portfolio to your acceptable levels.
Risk Reduction Techniques
Risk Reduction through Diversification: The most common method 
presented in the marketplace is Diversification. For decades, money managers have been implementing the strategy of diversification to reduce risk in your portfolio. Diversification as a risk management technique, is based on the foundation of utilizing various trading instruments such as stocks, bonds, and mutual funds in your portfolio. The objective is to be exposed to different sectors and financial instruments of the market at the same time, thus reducing the risk if one particular piece were to decline sharply. A significant drawback of this strategy is that broadly declining markets, diversification will not prevent losses. It is utilized to minimize losses that might be incurred by significant losses in one particular sector of the economy.
Several other deficiencies of diversification are: First, you can not limit your risk to your personal risk tolerance level in your portfolio. Your maximum risk can not be calculated because the relationship between the various trading instruments is not defined or fixed. The second drawback of diversification is that the same forces that minimize losses in your portfolio also applies to the growth in your portfolio. By using different trading instruments that respond to changes in the market at different rates, you are also slowing growth because securities that perform well will be offset by losses in other securities.
Risk Management by Using Options and Futures: A Put contract gives the owner 
the right, but not the obligation, to sell stock at a specific price (Strike Price) on the expiration date. Think of Puts as an insurance contract similar to insurance on your home or car. You pay a premium to buy an insurance policy that will pay you if your home burns down or if you wreck your car. Puts are insurance contracts for your portfolio. Let's look at an example comparing a stock trader with an options trader using puts. Assume a stock trader owns 1000 shares of Enron back in 2000 when it was trading at its split-adjusted high of about $87 per share. Our option trader also owned 1000 shares of Enron, but also owned 10 Put contracts giving him the right to sell his 1000 shares of Enron stock anytime in the next 120 days for a guaranteed price of $87.50 per share. The put contracts cost $3,000 so his cost basis in his trade is $90,000. As you know, Enron disclosed significant accounting irregularities and the stock plummeted straight down. Our stock trader realized substantial losses, while the options trader was protected from downside moves and exercised his option to sell his stock at $87.50.
| Example of Enron Trade |
Stock Trader |
Options Trader |
| Cost of 1000 shares of Enron @ $87. |
$87,000 |
$87,000 |
| Cost of 10 PUT contracts expiring in 120 days at a strike price of $87.50 |
$0 |
$3000 |
Cost Basis of Trade
|
$87,000 |
$90,000 |
| Maximum Risk |
$87,000 |
$2,500 |
| |
|
|
| Results |
|
|
| Enron traded for less than $60 in 2001 ? assume stock sold at $60 |
($20,000) |
($2,500) |
| Enron traded for less than $1 in 2002 ? assume stock trader held stock hoping for a bounce back. |
($87,000) |
($2,500) |
You can see that using Puts as insurance on your investment provides absolute risk reduction by limiting your risk of loss to a quantifiable amount. Being able to calculate your maximum risk in your portfolio is a better risk reduction technique that is available to options traders. If you own stocks and do not own Puts protecting your portfolio, you are at risk. This information is presented in the table below.
We are focused on growing and preserving capital assets safely using advanced derivative products including options and futures. If you would like to talk with us about our superior asset management program,simply submit your information below.
Imagine being part of an elite group of knowledgeable investors who benefit from great profits year in and year out -- bull market or bear market.
At Tactical Wealth Advisors our options portfolios fee structure is based upon performance of your investable assets. We only receive a fee from the profits we generate in your account. Thats right our fee is only charged if you make money. *
*There are certain trading costs that are associated with the transactions in your account. These fees are paid to the financial institution holding your securities assets and are not paid to Tactical Wealth Advisors. Whenever possible we utilize trading platforms that offer what we believe are the best value based on services provided and cost for those services.
If you are interested in talking with us about managing your portfolio using advanced options and futures combination strategies, please complete the form below and we will contact you.
