Hedge the Market and Understate Your Returns

What a perfect time to protect your long portfolio. You don't want to sell your winners for fear you will miss additional upside. The current rally is rising the tides on good and bad stocks. We need to sell high, not just buy low.

How do we solve this problem? Buy market puts.

A little while ago I bought Dow Jones puts called Diamonds (DIA). The ticker for this particular month and strike price is .ZAWMJ (different letters for different months). This is my way of solving this exact problem. I believe in my stocks, I will not sell my stocks, but I might lose some profit when the market goes back down. I bought these particular puts because I have market exposure tied to the Dow Jones Index.

I bought them for a price of $6.45 per put. My current portfolio shows a loss because the current price shows $6.00. But if you look at the bid price of these puts, the price has hovered around $7.00 (or well above it).

The result? In some ways, you could say the value of my portfolio is understated. It won't be forever. My option expiration is in 2009. As that time draws closer, the volume traded will rise, and the puts will be marked to market price. I'm happy to hold them and wait until then. I expect their value to rise -- or else my stocks will.