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Invest in Dow Chemical?

Johnson and Johnson?

Boring.

What, Dow chemical pays a 7% dividend?

It's P/E ratio is what? 8?

Are you kidding me?

That's amazing but it's still a boring stock, it never moves very much. Wait a minute. Right now that's not really a bad thing. Besides it has moved quite a bit. Moved down.

Hey I get it now!

It's on sale!

But it's still trending down.

That's right and if there is any hint that it is basing or even breaking that down trend line, I'm jumping in with both feet. In the mean time I am going to be developing a list of blue chips that are deeply discounted.

I have never seen myself as someone who would trade Blue Chips but somewhere in my brain is the thought that I would love to have a portfolio with Blue Chips as core holdings. So if I don't add these positions at a deeply discounted price, when will I have another opportunity like this? Maybe never.
But when should I buy them?

The trick is in knowing when the bottom is in. Since my crystal ball is currently at the shop being repaired from the last time I threw it at the wall, I'm going to be buying with insurance.



Protective puts;

Puts are option contracts that bet on a downward move in a stocks price. Why would you make a bet that a stock that you own is going to drop? The same reason that you buy auto insurance. You are not wishing for an auto accident, but IF it happens, you are covered.

The same applies with protective Puts. If the stock drops, your option contract gains value, thus off setting the loss in stock value.

At that point you can then decide to sell your stock and the option contract, just the option contract or just the stock. you can also sell the option at a profit and buy one dated further out for continued protection. If the stock rises or stays the same your contract will expire worthless and you may or may not decide to buy another(renew your policy).



This is one of the intended purposes of options, it is a strategy that most serious traders employ and it will serve you well when you can't see the bottom through your busted crystal ball.





JT

Legal disclaimer: This post is for informational purposes only and is solely the opinion of the writer. Nothing in this post should be considered investment advice. Before investing in anything, the reader is encouraged to do his or her own research and consult with a certified financial advisor. Which John Tompkins makes no claim to be. John Tompkins and Toro Creek Investments accept no liability for financial losses or damages incurred by the reader because of this post.