As we leave winter and warm up towards spring and summer, outdoor activities are top of mind for the adventurous. Camping and hiking in the wild or mountaineering may be some of the adrenalin-driven activities undertaken by some. In preparation for such a trip, an unavoidable task is a crash course on survival skills.
The four important survival skills in the wild I have learnt are:
1 | How to build a fire
2 | How to look for shelter
3 | How to ration food and water
4 | How to apply first aid
I am advised it’s common to encounter roadblocks on the way; dodging dangerous animals, steering clear of poisonous insect bites or even keeping tight quotas on food and water to stay alive.
Investing in the stock market at the moment feels like an adventurous trip in the wild. We try not to fall into traps such as earnings downgrades, avoiding poisonous and unexpected negative economic and political news and falling prey to the bigger players in the market.
It is imperative then as investors we should arm ourselves like adventurers do, with survival skills.
Build a fire
Campers build fires to keep warm, provide light and comfort in the wild. As an investor, after large capital losses are either realised or still sitting in our portfolios, we no longer have the luxury of sitting on the warm and fuzzy feeling of capital gains. The only comfort we can now have is what’s in the pocket; cash in our bank accounts to keep us warm.
Cash does not just come in the forms of dividend incomes and interest income from cash in banks or fixed interest products such as hybrids, but cash can come in the form of options income as well.
I have come across a very innovative survival skill in a website – Wildwood Survival, if you’re interested – which teaches how to build a fire from a can of Coke! The use of options to generate income falls into this category. Some shun it for its leveraging ability, but it is also what’s needed as an innovative survival skill in this wild market.
Selling of options for income (strategically done, of course) is definitely paramount in an environment where we need all the cash we can get to stay warm (more on strategies below).
Look for shelter
We need shelters to be protected from the cold, wind or even heat. Shares that are not protected and left to the wind of the stock market do not have shelters.
Many investors are not used to the idea of buying insurance for their shares. Investors could buy put options on specific shares or just over the XJO Index. As the specific shares or overall market fall, investors will be compensated with higher priced put options. In a wild windy stormy environment, this may be unavoidable. Besides, with options, one does not need to just buy insurance, one can even sell options for premium, providing some cover AND income at the same time. Investors can sell XJO call options for a bearish play on the overall market or sell covered call options over specific shares owned to generate extra income.
All investors should be armed with this survival skill for shelter.
Ration food and water
Preserving capital is a big survival skill in the wild. Water is the source of survival. It’s said that we can survive without food for up to 20 to 30 days but without water, we will probably last for just three or four days.
Food is like capital gains to me: we all need it, but in its absence, it’s cash (liquid) that will keep us going.
One key options strategy in keeping the juices flowing for the portfolio is by using the Buy Write strategy over dividend paying stock. This strategy involves buying shares with a simultaneous selling or writing of call options over the same shares. It not only gives the investor the opportunity of getting the dividends but also an added income stream from the selling of the call options. Buy Write gives investors a potential exit route as well, if assigned to sell the shares at the call strike (generally at a profit).
Another survival tip from the experts is to keep the water clean or learn how to purify water. This is an important skill to help investors avoid applying the strategy over any shares. In a volatile environment, it’s important that investors stick to the steady stocks, those that are known to keep their revenue and profits flowing despite the state of the economy (not just any water, but clean water). Some of these types of companies that come to mind are Telstra, Woolworths, and AGL Energy.
Applying an income generation strategy like Buy Write over defensives shares will provide another layer of protection for investors.
Applying first aid
Applying medicine to a wound is generally a painful exercise, but if not done, the injured may either not survive the rough conditions or not get out of the wild in one piece.
After such heavy falls in the market, its not uncommon to have stocks sitting on capital (wounds) losses, some may be even very large ones. The way to survive may seem too obvious, heal the wound.
One such strategy available is the Synthetic Long Strategy. This is how it works: instead of holding on to the losing shares that have recently gone
ex-dividend, they are sold for cash and the exposure to the share is replicated by implementing the Synthetic Long Strategy. This strategy involves the buying of calls and selling of puts simultaneously on the shares sold. The expiry terms of the calls and puts are positioned just before the next dividend period.
The calls will be exercised to buy the shares should the share rises in value towards its next dividend period while the puts sold will reduce the cost of the calls bought.
This strategy not only frees up cash, but guarantees a leg back in to the share before the next dividend date. As cash is freed up and is used more judiciously, the wound gets smaller and generally heals quicker.
Finally, despite learning and applying all these important survival skills, the biggest enemy we need to watch is the one within – to keep calm in all circumstances. Stop, don’t panic and think!