Not for Beginning Investors – Bought Put Options of GE
Posted on | September 28, 2009 | No Comments
I have been ranting for a while about how overvalued the stock market seems to me right now, based on actual earnings. It seems pointless to normalize earnings if we are not headed for a period of trendline growth. Virtually no one is predicting that for the forseeable future. Too many headwinds.
Last Wednesday I initated a new position. It is definitely not for new investors but it is a classic hedge position. Today I bought 4 contracts for put options on General Electric (GE) at $16.00 expiring in October. There is nothing about this that is a value investment play. It is unusual for me, but supports my bearish call on the market. If I am wrong, I won’t lose that much.
First, what is a put option? A put option is the opportunity but not the obligation to sell a specific stock at a specific price through a specific time. In this case I bought what are called out of the money options. That is an option that doesn’t have any instrinsic value, although that doesn’t mean the option doesn’t have value. But if the price of GE doesn’t decline to below $16.00 by October 20th the options will expire worthless. So the $126 I invested for options on 400 shares (4 contracts) is my total potential loss.
In this case General Electric which I own a few hundred shares although I bought the shares prior to chroma investing. This is a hedge on my GE and on the economy as a whole. The shares of GE had a big run up last week on a buy recommendation from a couple of analysts. I am not convinced the market is going to going down. But given that the worse months for crashes and dramatic down turns are September and October, I thought it was a good time to take a short term position. to protect for the possible of a severe market downturn. I bought the put options when GE was around $17.30/share. In the subsequent few days GE declined over a dollar a share, but has since risen back up.
I don’t advise taking this position for several reasons. First, I may have the timing of the pull back wrong. It could come later than the expiration of my options. Second, this is a hedge on GE whose long term prospects I like, particularly if they sell NBC/Universal. But in the short term it could go back down. If you don’t own GE stock you are not hedging your position.
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