Editor's note: This was originally published in two parts on RealMoney. It is being republished as one article as a bonus for TheStreet.com readers.
High-Volatility Investing, Part 1: Avoiding High Anxiety in Times of High Volatility
When the market resembles a jar of jumping beans, substituting call options can lower downside risk.
It is a familiar story these days. You have pretty demanding criteria for new positions, but you do some research and find a stock that meets them. Despite your care, the stock tanks.
When the market is making huge daily moves with little fresh information, investors need special tactics. In a series of articles, I am going to suggest ideas for dealing with high volatility and some stocks that fit the bill. The following strategy should be considered an alternative for any investment where you like the stock but recognize downside risk and high implied option volatility.
For our purposes, assume your candidate is undervalued (in both absolute terms and relative to the market) and exhibiting a lot of volatility -- making big swings in line with the major indices. For example,
(CAT) has been a
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV