protect yourself from a debt ceiling collapse

[rdking647]

if you have a retirement account or a stock portfolio you owe it to yourself o take steps NOW to protect yourself in case the teahaddists push us over the cliff
a debt default could cause a recession that would make the 2008 bush recession look like a drop in the bucket
we could easily see the dow drop 1500-2000 point or more in a heartbeat

if you are able to talk to your broker about getting your account able to trade options.

step 1. determine how much of your portfolio you want to protect. im going to use 50k for this examply
step 2 decide how much of a drop you will accept. im going to use 5% as an example
step 3 with the s&p 500 at 1675 (where it is now) that means the ETF with the symbol SPY is around 167. (its about 10% of the s&p
add 2 zeros to the SPY price and divide what you want to protect by that (50000/16700=2.98) round to the nearest whole number
that show the number of put contracts you need to buy to hedge your portfolio
step 4 buy that number of contracts at the strike price you want to protect with a november expiration. using a 5% example and a 167 SPY price that implies a strike price of about 159


heres how it works
the november 159 SPY puts are trading about 1.50 per contract. each contract covers 100 shares so each contract costs $150. 3 contracts would cost $450

if the rethugs cause a collapse and the market crashes--
down 5% your portfolio loses $2500 + the 450 you spent on the options or about 6% total
down 10% (so the SPY is trading 150)
your stocks lose 5k. your options are now worth 900 each or 2700 total. your total lose is the 5k +the 450 you spent on the options-the 2700 they are now worth. you lose 2750 or 5.5%
at a 20% drop (like the crash of 87) the SPY would be at 134. your total loss would be 10000 on your stocks + the 450 you spent - the 7500 your options would then be worth or a total of 2950

my numbers have a bit of rounding in them but you get the idea. you dont lose more than 6% no matter what
if there is no crash and the market stays here you lose the 450 you spent on th eoption - whatever you can sell them for

ive hedged about 30% of my total portfolio so far and plan on increasing that to around 60-75% before the debt ceiling is reached

[lostincalifornia]

1. If people are that concerned about their portfolio they should sell out of their stocks, and wait on

the side lines until this blows over.

Encouraging people to buy options is not for everyone. In fact, if it gets bad enough, it is not unprecedented to halt the markets, and the option holders are left holding the bag until the markets reopen, and if at that time things are resolved, they won't have time to get out.

I would never encourage someone to go into any investment, especially options, unless they know the risks involved, and take the time to learn them, not in a panic mode.

and in the crash of 87 if you recall it did not take long for that market to come back relatively quickly

The best advice for most people if they have good quality stocks and bonds in a diversified portfolio, and they do not need the money in the next several years, is to just sit tight.

What is right for one person does not necessarily apply to everyone

[rdking647]

3. th eproblem with selling all your stock.....

taxes. if its not in a retirement account.
also if you sell your stocks you lose the chance to participate on the upside.

my method means you still get the upside potential at a cost of what you pay for th eoptions

and the only risk in buying options is you could lose what you pay for the options

the crash of 87 came back quickly.
the crash of 2008---- not so quickly

and a debt default into an already weak economy with a bunch of terrorists in congress....


and im not worried about a halt in trading. the market as a whole wasnt halted during teh depression. the only time it was halted was in 1914

[lostincalifornia]

4. If most of your assets are not in deferred accounts, then for you buying protection

Makes sense

I also was not necessarily recommending people should sell and wait

If people have a good quality diversified portfolio and no immediate need of liquidity, staying put makes a lot of sense

However, if people do need the money for immediately living expenses, I would suggest they should not be in the market

In the most ideal situation people would have invested through the years in such a way that dividends and interest are paid out that they would be able to live on that income without asset sales

[gopiscrap]

2. Good advise