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Managing
Risk with
Warrants, Options & LEAPS
Regardless
of what the markets are currently doing, now, more than ever
is the time to take action to protect your portfolio.
Over
the last few weeks investors have been very very surprised at
the performance of virtually all of the markets with the big
initial shock coming from the 9% decline in the Shanghai markets
overnight. Many analysts have had some great insight into what
the problems are, the effects of them and how investors should
approach the markets.
Unfortunately,
we have many different opinions from these analysts. While differing
opinions are great to read it can and does create much doubt
in the mind of the average investor. This is truly a time that
you, the investor, must firmly believe in your investment philosophy
or at a minimum attempt to protect yourself in the event you
are wrong.
We
personally follow many of the top analysts and also read as
much as possible on websites for information and conflicting
opinions. While, yes, we have our own opinions much is based
upon the collective views of some of the top analysts in the
world. When our favorites are not on the same path we attempt
to evaluate the risk of our investments and how to manage this
risk with long-term warrants, options or Leaps.
Recently
Jim Rogers, which I like to refer to respectfully as Mr. Commodity,
was quoted as, predicting “a real estate crash that would
trigger defaults and spread contagion to emerging markets…..You
cannot believe how bad it’s going to get before it gets
any better….It’s going to be a disaster for many who
don’t have a clue about what happens when a real estate
bubble pops….the crisis would spread to emerging markets
which now faced a prolonged bear run….This is the end of
the liquidity party….Some emerging markets will go down
80 percent, some will go down 50 percent….some will most
probably collapse.”
Dr.
Marc Faber says, “most investors are heading for huge losses…but
gold to outperform.”
Richard
Russell says, “….gold looks fine. Stop worrying.”
Chris
Laird speaks of a, “World Liquidity Crisis Emerging.”
Another
analyst writing on these websites which I respect is Adam Hamilton.
Adam sees the possibility of a 2 year bear market in the equity
markets similar to the 1973 – 1974 with a drop of approximately
45 - 50% in the Dow by the end of December 2008. On the other
hand he sees gold, silver and the commodity sectors increasing
as eventually the fear and the fleeing money in the equity markets
will find a new home in the commodities. He sees this commodity
cycle, by historical standards, as being only about half over
with much more excitement to come.
Short-term
we did have all markets recently going down together - equities,
gold, silver, mining stocks, etc. This has now scared many precious
metals investors into thinking that if the equity markets collapse,
then so will gold, silver, and the mining shares. This we believe,
however, will be only a short-term disconnect before the money
goes into the commodity sectors.
A
few of the mine fields in the investment arena today:
World Liquidity
Yen Carry Trade (and the unwinding thereof)
Derivative markets
U.S. Sub-Prime mortgage market
U.S. Dollar
U.S. Deficits
Iraq and Iran
Any
of the above could bring down the entire house of cards as we
know it today. Scary times? You bet. I personally suspect one
day an event will occur in the derivative markets or with the
unwinding of the Yen carry trade. These are areas of which the
average investor has absolutely zero knowledge other than perhaps
hearing the terms mentioned in the financial press or on CNBC.
Think about it, investors would not even know what hit them
nor be able to explain it. Like being hit by a truck and not
even seeing it coming at you. At least it will be quick but
the financial pain could easily last a lifetime if you are not
properly positioned.
With
the above gloomy backdrop, what is the level of risk you are
willing to accept?
Remember
as investors, each of us must make this decision each day in
the financial markets. The decision of risk is ours and ours
alone, not our brokers or advisors. The ultimate responsibility
lies with each of us. At the end of the day, if our investments
do not perform, we must take responsibility for the losses ourselves.
Should
we as investors be concerned about unfolding events? Should
we be fearful? Should we be running for the exits? Maybe all
of the above are appropriate as this is surely a time for immediate
reflection on our investments and the protection thereof.
Allow
me to address briefly how two different classes of investors
could address this financial dilemma:
1.
If you are an investor still primarily investing in traditional
equities and perhaps the emerging markets:
Liquidate all your stocks or positions
Liquidate enough to be comfortable
Use Puts, i.e. Leaps on the Standard & Poor’s 500 for
downside protection
Invest in precious metals, the bullion, mining shares, long-term
warrants, call options, Leaps or ETF’s on gold or silver.
2.
If you are an investor heavily involved in the precious metals
sector, mutual funds, mining shares or long-term warrants:
Liquidate enough of your positions to be comfortable holding
the cash in Euros
Increase exposure to the bullion or ETF’s on gold or silver
Purchase Leap Puts on an index, i.e. Standard & Poor’s
500 for downside protection
Will
the current storms pass without incident? Perhaps, but financial
well being and decision making are now front row center.
If
you would like more information on options and leaps you should
visit the Chicago Board Option Exchange. For information on
long-term warrants (up to 5 years), we welcome you to visit
our website.
For
our subscribers of record as of this Sunday evening at 7:00
CST, we will be sending out our personal and specific plan for
dealing with the management of risk.
March
22, 2007
Dudley
Pierce Baker
Guadalajara/Ajijic,
Mexico
Email:
info@preciousmetalswarrants.com
Website:
PreciousMetalsWarrants
Dudley
Baker is the owner/editor of Precious Metals Warrants, a market
data service which provides you with the details on all mining
& energy companies with warrants trading on the U. S. and
Canadian Exchanges. As new warrants are listed for trading we
alert you via an e-mail blast. You are provided with links to
the companies’ websites, links to quotes and charts, tips
for placing orders and much, much more. We do not make any specific
recommendations in our service. We do the work for you and provide
you with the knowledge, trading tips and the confidence in placing
your orders.
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Disclosure/Disclaimer Statement
PreciousMetalsWarrants.com is not an investment advisor and any reference to specific securities does not constitute a recommendation thereof. Neither the information, nor the opinions expressed should be construed as a solicitation to buy any securities mentioned in this Service. Examples given are only intended to make investors aware of the potential rewards of investing in Warrants. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions involving stocks or Warrants.
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