How to protect losses in the stock holding in the current market
Investing in the stock market can be a tricky job. There are chances you could gain a fortune. But that does not deny the fact that there are chances you might suffer huge losses if you are not smart enough. Sometimes the loss you bear is clear and immediate, such as when you buy a share at a higher price that has plummeted. Sometimes your losses are not as apparent because they are subtle and take a more extended period. Loss in the stock market comes in various types, and all the forms are painful for an investor, but you can mitigate it with a positive mindset and willingness to learn from the current loss.
Type of losses
Opportunity losses
Opportunity loss is a form of loss that is harder to quantify but still very real. This is the difference between optimal and actual price payoff for buying a stock. For example, you invested your money in the stock market. You bought a stock for Rs.20000 of a hot growth stock, and after rising by a small margin, it came back close to what you have paid. You might be thinking that at least you have not lost any money. You have lost the opportunity to invest somewhere else and earn interest over it. This is known as opportunity loss.
Capital losses
A capital loss is a form of loss that is easy to quantify and perhaps most painful. It is incurred when an asset is sold at a price lesser than the amount purchased. Investors lose money in the stock market by selling a stock lower than its purchase price. Holding of the asset may lead to more and more losses. Capital loss can be divided into short-term and long-term capital losses and can be set off against capital tax purposes.
Missed profit loss
Missed profit loss is a loss in which you watch a stock gain significantly run up and then fall. Most of the time, investors cannot call the top or bottom of the stock. You might be thinking that you lost the money you could have made. Some investors sit tight even after the fall, hoping to share recovery. The best cure for this type of loss is to have an exit strategy in place and to be happy with a reasonable profit.
How to deal with losses in the share market?
Accept responsibility: If you have made a loss, don`t try to hide or run from it; taking ownership of your losses is the first step toward taking control of your investment.
Analyze your choice: Review your decision and check what you could have done differently. Would you have lost less or may end up in profit if you acted differently?
Plan: Experience teaches you to make the right decision. Your experience will teach you what to do and what not to do. Make a detailed plan and learn from your experience for your future endeavors.
Motivated: keep the loss as the motivation and don`t take it personally. Use this as learning and developing skill opportunities. Remind yourself that a lot of people out there lose money as you did- perhaps even more of a hit than you did.
How to protect losses via option strategy?
Sell a covered option:
A prevalent option strategy primarily used to enhance earning potential offers some protection against loss. When an investor executes the covered call option, holds a long position of the stock,k and tries to capture the limited upside with the help of a premium.
For example:
An investor bought 200 shares of ABC company at Rs.100 each, thinking it would rise to Rs.110. To create a covered `call` option, an investor can sell the `call` option at the strike rate of Rs.105/share. Here, an investor will receive Rs.5/share or Rs.1000 as a premium. Consider that the price falls to Rs.90/share. Due to the covered call strategy, investors can save themselves from the outright loss of Rs.2000 on their portfolio. Therefore, investor loss would be reduced to Rs.10/share, i.e. Rs.1000 (Rs.2000 – Rs.1000 = Rs.1000). The Rs.1000 premium received offers a cushion against the stock price decline.
Put option:
A popular bearish options strategy is commonly used when investors expect the market to fall—considering the current indices. The equity market is witnessing a roller coaster ride. You are lucky if you purchased a long-dated “put option.” Therefore, you can consider buying a long-dated `put option` to protect your portfolio from these risks. Consequently, you can consider buying long-dated `put` options to protect your portfolio from these risks.
For example:
Let us assume that you are very optimistic about Tata Motors. Still, you also believe that Tata Motors stock could take a hit in case of any negative interest rate announcement. Even as investors hold on to their stock position, investors simultaneously use options to reduce risk.
Tata Motors – Bought at Rs.398 | Tata Motors 390 put option bought at Rs.4 | Creation of a hedge on Tata Motors PriceOption marks to markets. That is in case of adverse interest. In the above case, buying a lower put option has hedged the TATA Motors equity market position. What this put option assures an investor is that under no circumstance will the loss on their position be more than Rs. 12 (398 – 390 + 4). Due to hedging, investor maximum loss has been clearly defined, and therefore they can work accordingly, knowing fully well that come what may their total loss on the hedged position will not exceed Rs.12. That is because as the price of TATA Motors falls below Rs.398, investors.
