Investing - Managing Risk with Warrants, Options & Leaps

Regardless of what the markets are currently doing, now, morethan ever is the time to take action to protect your portfolio. Over the last few weeks investors have been very very surprisedat the performance of virtually all of the markets with the biginitial shock coming from the 9% decline in the Shanghai marketsovernight. Many analysts have had some great insight into whatthe problems are, the effects of them and how investors shouldapproach the markets. Unfortunately, we have many differentopinions from these analysts. While differing opinions are greatto read it can and does create much doubt in the mind of theaverage investor. This is truly a time that you, the investor,must firmly believe in your investment philosophy or at aminimum attempt to protect yourself in the event you are wrong. We at Precious Metals Warrants (http://www.preciousmetalswarrants.com,)personally follow many ofthe top analysts and also read as much as possible on websitesfor information and conflicting opinions. While, yes, we haveour own opinions much is based upon the collective views of someof the top analysts in the world. When our favorites are not onthe same path we attempt to evaluate the risk of our investmentsand how to manage this risk with long term warrants, options orLeaps. Recently Jim Rogers, which I like to refer to respectfully asMr. Commodity, was quoted as, predicting "a real estate crashthat would trigger defaults and spread contagion to emergingmarkets. You cannot believe how bad it's going to get before itgets any better. It's going to be a disaster for many who don'thave a clue about what happens when a real estate bubblepops....the crisis would spread to emerging markets which nowfaced a prolonged bear run. This is the end of the liquidityparty. Some emerging markets will go down 80 percent, some willgo down 50 percent, some will most probably collapse." Dr. Marc Faber says, "most investors are heading for hugelosses...but gold to outperform." Richard Russell says, "gold looks fine. Stop worrying." Chris Laird speaks of a, "World Liquidity Crisis Emerging." Another analyst writing on these websites which I respect isAdam Hamilton. Adam sees the possibility of a 2 year bear marketin the equity markets similar to the 1973 - 1974 with a drop ofapproximately 45 - 50% in the Dow by the end of December 2008.On the other hand he sees gold, silver and the commodity sectorsincreasing as eventually the fear and the fleeing money in theequity markets will find a new home in the commodities. He seesthis commodity cycle, by historical standards, as being onlyabout half over with much more excitement to come. Short-term we did have all markets recently going down together- equities, gold, silver, mining stocks, etc. This has nowscared many precious metals investors into thinking that if theequity markets collapse, then so will gold, silver, and themining shares. This we believe, however, will be only ashort-term disconnect before the money goes into the commoditysectors. A few of the mine fields in the investment arena today: * World Liquidity * Yen Carry Trade (and the unwinding thereof) * Derivative markets * U.S. Sub-Prime mortgage market * U.S. Dollar * U.S. Deficits * Iraq and Iran Any of the above could bring down the entire house of cards aswe know it today. Scary times? You bet. I personally suspect oneday an event will occur in the derivative markets or with theunwinding of the Yen carry trade. These are areas of which theaverage investor has absolutely zero knowledge other thanperhaps hearing the terms mentioned in the financial press or onCNBC. Think about it, investors would not even know what hitthem nor be able to explain it. Like being hit by a truck andnot even seeing it coming at you. At least it will be quick butthe financial pain could easily last a lifetime if you are notproperly positioned. With the above gloomy backdrop, what is the level of risk youare willing to accept? Remember as investors, each of us must make this decision eachday in the financial markets. The decision of risk is ours andours alone, not our brokers or advisors. The ultimateresponsibility lies with each of us. At the end of the day, ifour investments do not perform, we must take responsibility forthe losses ourselves. Should we as investors be concerned about unfolding events?Should we be fearful? Should we be running for the exits? Maybeall of the above are appropriate as this is surely a time forimmediate reflection on our investments and the protectionthereof. Allow me to address briefly how two different classes ofinvestors could address this financial dilemma: 1. If you are an investor still primarily investing intraditional equities and perhaps the emerging markets: * Liquidate all your stocks or positions * Liquidate enough to be comfortable * Use Puts, i.e. Leaps on the Standard & Poor's 500 fordownside protection * Invest in precious metals, the bullion, mining shares,long-term warrants, call options, * Leaps or ETF's on gold or silver. 2. If you are an investor heavily involved in the preciousmetals sector, mutual funds, mining shares or long-term warrants: * Liquidate enough of your positions to be comfortable holdingthe cash in Euros * Increase exposure to the bullion or ETF's on gold or silver * Purchase Leap Puts on an index, i.e. Standard & Poor's 500for downside protection Will the current storms pass without incident? Perhaps, butfinancial well being and decision making are now front rowcenter.