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    Friday, August 19, 2005


    NASDAQ (QQQQ) Puts as insurance

    I believe that we are nearing the end of this bull market that started a few years ago. There are many reasons I think that this is the case:
    This has me worried primarily due to liquidity. Not the type of liquidity I mentioned above but the likelihood that investors will have to liquidate holdings of stocks that I’m invested in to meet margin calls on tech stocks. What really worries me is that the fall of the NASDAQ that I think is coming (and based on historical data will likely be lower than the 2001 bear market lows) is going to suck down the price of sound, undervalued companies. I hope that very few investors are both in Technology and Uranium (for example) but a sinking market is going to lower all boats!

    Again I am hoping that resource stocks will fall with the market, but less so and then rise again as money will flow into the only asset class not doing quite so badly. I’ve invested in QQQQ puts and if the NASDAQ goes down and resource stocks up I’ll make money on both sides (long resource stocks, short NASDAQ). However, if NASDAQ stocks go down and drag down resource stocks with them, I have a chance of making enough money on the NASDAQ puts to offset the losses. Ideally I would like a stash of cash on the sidelines to buy more if this happens, but with fundamentally significantly undervalued companies, I am choosing to stay fully invested and ride the tide.

    These are my estimations 1-2 years out:
    I expect to end up somewhere around cases 3-4 and as time passes I think case 4 becomes more likely than case 3 as the lowering of interest rates as a result of the NASDAQ fall will probably cause liquidity to flood somewhere and natural resources are a good bet given the other fundamentally positive forces.

    Anyone with exposure to the US market should well consider putting a little (10% or so) money into QQQQ LEAPS over the next 6 months. If the NASDAQ doesn’t fall you had insurance (no one ever complained about paying car insurance premiums and never having a claim!) but the risk today in the NASDAQ is to the downside.
    Do you prefer in or out-of-the-money LEAPs for this strategy? Thanks for the great site.
    I guess it's about risk reward. The more out of the money, the less the risk (because the options are cheaper) but thr upside is slightly reduced also. I have been buying at the money puts, more or less, though they are now out of the money.

    The best option is probably to have a mix of very out of the money, a little out of the money and at the money puts. If we do see a 40% + drop in a recession it won't really matter, you'll do very well either way (or as a hedge you will break even across your portfolio.)
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    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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