Stocks have been mostly higher the past five months, with the Dow Jones Industrial Average recently topping 13,000 for a few days and the Nasdaq Composite touching the key 3,000 mark on the final day of February.
However, the markets have turned erratic the last week or so, and big moves like last Tuesday’s plunge have left many investors to worry about a looming stock market correction.
Normally, that would send options-savvy investors in search of protective puts so they could lock in profits on their long stock positions.
In doing so they essentially are buying an “insurance policy” that would pay off should prices indeed turn lower in the next couple of months.
But, as readers who checked out Money Morning writer Don Miller’s Wednesday article on the VIX Indicator, which measures trading activity in options on the Standard &Poor’s 500 index – and, by association, options on individual stocks comprising the major indices – last week’s jump in volatility sent put prices sharply higher.
In fact, the VIX Indicator itself jumped from just 16.83 on Feb. 23 to a reading of 20.84 on Tuesday.
And, though it has pulled back a bit since, the volatility means merely buying protective puts at this time would be a fairly costly proposition.
As an example, assume you hold 100 shares of stock in Las Vegas Sands Corp. (NYSE: LVS), having happily watched as the market’s rally carried its price from an Oct. 3, 2011, level of $36.71 to a March 1 high of $56.82.
However, the $3.33 decline by LVS last Monday and Tuesday leaves you little doubt the stock would be vulnerable in any upcoming stock market correction.
And even though the stock rebounded to $55.29 by Thursday’s close, you still feel like you need a little protection for your paper profits.
So, what do you do?