Why You Need Insurance

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For most of this morning I have attempted to price a series of out-of-the-money calls for insurance. That's odd: Isn't insurance supposed to be something that protects you from the downside? Isn't it meant to make you whole if an accident occurs?

Wrong! Pros use calls to protect them from an upside explosion that would leave them without enough stock once they got there. This market is ramping and I think it is going back to the top of the trading range. But what if it exceeds the trading range -- which I have not expected, but which my wife expects to occur while we are on vacation in July? She's just trying to make life tough for me, I tell myself.

What if we get a market that blows through my price target of 9500? I don't want to be buying stocks up there. I want to be selling. But I don't want to lose my exposure. So I am pricing out-of-the-money calls.

Normally I hate them. They almost always go out worthless. But for insurance purposes, whether upside or downside, you can't beat them, if you can find them below a dollar for a stock you love. That way, when the stock keeps flying at Dow 9500, you can sell the common and just play with the call for much less capital on the line. But if the market punks out, you won't miss the capital that badly. (I am not condoning losses -- I am just talking about a strategy that works for me.)

In the last few days I have gotten a ton of mail saying "tell us which ones." People will say that I only tell them what I did after it matters. There is a reason for it. When I send my pieces in, I don't want

Dave Kansas

, the editor-in-chief, to kill them. Dave would kill any piece that said, with National Gift Wrap at $30, I am buying 5,000 July 35 calls for 30 cents. Why? Because merely by my writing that, these thinly traded calls would probably immediately double, as we have lots of readers and some would have to be tempted. I would then be tempted to sell some calls, because they doubled in value, and my style says that I take something off the table when I get a double. So it is not fair, not right, not ethical and not what anybody would want from a publication trying to do the right thing.

Suffice it to say that the type of stocks I look for are ones that are strong, big-cap growth type stocks. For these kinds of stocks -- especially ones that have already made a strong move -- I am only buying July paper because I need upside protection against a quick blow-off, and all the August paper I have priced is way too expensive.

Random musings

: This

Bill Seidman

interview this morning was unbelievably bullish. This no-BS guy is saying the Japanese are going to do the right thing. Why should he lie? He has said for years that the Japanese weren't going to do the right thing. Dovetails with my belief that there is change -- real change -- going on.

James J. Cramer is manager of a hedge fund and co-chairman of TheStreet.com.

Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column by sending a letter to TheStreet.com at

letters@thestreet.com.