A common problem among many investors is to know when to take profits. Often a position is cut too early, before a run up or down, or too late, thereby giving up unrealized profits.
One of our solutions to this problem is the Profit Protection Overlay, the PPO for short. With the PPO, investors have the possibility of protecting profits while retaining the potential – of participating in ‘bubbles’ on the way up, with rising prices, without giving back unrealized profits when the bubble bursts.
Details of the Profit Protection Overlay
The purpose of the PPO is to protect unrealized profits while at the same time retain upside (downside) potential if the price of the asset continues in the direction of the initial non-protected position.
- Underlying instruments; individual securities, such as stocks including Exchange-Traded-Funds (“ETFs”), also a few types of derivatives, e.g. futures.
- Instruments utilized; the PPO is implemented with options, either exchange traded or OTC from a Broker.
- Time-frame; the underlying positions should be held medium- to long-term. The PPO is not suitable for short-term trading.
- The PPO functions independently of used entry and exit rules for the individual underlying positions.
- The risk of using the PPO is low and known at all times. Only long options positions are used.
- The PPO is especially suitable for high risk premium assets, like Emerging Markets Equities and Bonds, Small-cap Stocks, High-yield Bonds and a number of Commodities.
The chart and table below show the potential of applying the PPO to a High Risk Premium Portfolio.
The High Risk Premium Portfolios above are allocated on the basis of a Risk Parity approach.
Send us a note if you would like to receive a report detailing the results.
Contact us for more general information and how to apply the PPO to your own portfolio.