By Joe G., Branch Manager and Guest Blogger
Sometimes it’s hard to admit mistakes. Even more so when you know, through training and experience, the right move to make and yet you still let your emotions get the best of you. Such is the case with how I was managing risk within my own portfolio a few years ago. I lost more money than I cared to during that time, but it didn’t have to be that way if I had simply followed some common techniques on managing portfolio risk, like the ones below.
Trading options involves risk, but there are options strategies that can be used as a potential hedge to help offset dramatic price swings. The protective put strategy is one of them and it is relatively straightforward. You simply buy a specific number of put options, which gives you the right to sell a stock or index at a certain price within a predetermined time period. By doing this, you know in advance the minimum price you will exit your position so you can protect against an individual stock or the market moving against you.
Collar Strategy
The “collar” strategy is another type of option strategy that can possibly help you limit your losses and manage risk. With a collar you’re limiting your upside potential but guaranteeing an exit price should the stock fall beyond your preselected price.
Stop-on-quote orders can help protect your portfolio from precipitous drops. Had I used stop-on-quote orders a few years ago, I would have cut my losses dramatically. Used correctly, stop-on-quote, stop-limit-on-quote, and trailing stop-on-quote orders are an easy way to give yourself piece of mind when you cannot monitor the market day to day. One caveat, stop-on-quote orders are not active during the pre-market and after-hours sessions.
Asset Allocation
Many of us have heard the term, but how many of us are actually doing it? Depending on your financial objectives and risk strategy, the goal of diversifying your assets is to minimize your investment risks. By investing a certain percentage of your portfolio in stocks, bonds, real estate, managed futures or commodities, and cash, you‘re employing strategic asset allocation. These asset classes generally move in different directions from one another, which can lead to a reduced impact on your portfolio when there are large market fluctuations.
What do you do to manage risk and limit losses when trading?
Joe G. has been with Scottrade since 2006 and is the branch manager in Parsippany, N.J.
Options involve risk and are not suitable for all investors. Detailed information on our policies and the risks associated with options can be found in Scottrade's Options Application and Agreement, Brokerage Account Agreement, and Characteristics and Risks of Standardized Options (available at your local Scottrade branch office or from the Options Clearing Corporation at 1-888-OPTIONS or by visiting www.optionsclearing.com). Market volatility, volume, and system availability may impact account access and trade execution. Supporting documentation for any claims will be supplied upon request.
A collar option strategy may help protect profits and offer downside protection, but may also limit profit potential and incur additional commissions, fees and charges.
Diversification may help spread risk it does not assure a profit, or protect against loss, in a down market.
Bonds involve risks including, but not limited to interest rate risk, reinvestment
risk, inflation risk, call risk, liquidity risk and a risk of loss of principal. New issue
offerings are sold by prospectus or offering circular available at www.scottrade.com. Investors should read these carefully.
Futures involve unique risks and are subject sudden price fluctuations. Please research each investment carefully before investing.
Commodities involve unique risks and are subject sudden price fluctuations. Please research each investment carefully before investing.