Don't Abandon Your Protection

By Lawrence G. McMillan

Last week, there was an article in the Wall Street Journal, saying that investors who have been buying protection are going to stop doing so, because of the losses incurred from buying the protection.  That line of thinking was thankfully countered in this week’s Striking Price column in Barron’s, where it was pointed out that many large investors want protection as insurance in case something unforeseen occurs.  I wrote an article yesterday for Moneyshow, and had this comment on the situation:

“Recently, it has been hypothesized that some buyers of protection are going to give up the practice because of the losses than have accumulated.  That is a fallacious argument.  Consider your home and the fire insurance you own.  Are you upset that you are not collecting on your insurance policy?  Of course not.  In addition, would you stop buying fire insurance merely because your house hasn’t caught on fire recently?  Again, of course not.  Similarly, if one is buying options as insurance protection for his stock portfolio, should the practice be terminated merely because the stock market keeps going up, and the insurance hasn’t been needed?  Of course not.”

This commentary was excerpted from yesterday morning's edition of The Daily Strategist. Read the full article by subscribing now. Sign up for a free 7-day trial today.