Here are the results so far:

Research in Motion (TSE: RIM) -27.08%

All right, investors are worried because major companies (such as JP Morgan) are switching from the BlackBerry to the iPhone. Investors are worried because RIM is having a hard time getting more individuals on board (while they continue to lose corporate accounts). Investors are also worried because the iPad is phenomenal and RIM has yet to hit the market with its new blackpad. Finally, I think investors are worried because RIM is becoming more and more reactive and has forgotten that they were the leader in the smartphone industry not so long ago. Presently, I have the feeling that they are just looking at what Apple does and are trying to copy it. I still hold RIM in my personal portfolio but I seriously doubt it will come back this year…

Manulife (TSE: MFC) -31.07%

I thought Manulife was over with the bad news when we started in 2010. I guess I should be more careful when I try to catch a falling knife! Manulife keeps on announcing bad news after more bad news. I still think it can bounce back (I wouldn’t if I hadn’t picked yet.. hahaha!)  but lets just say that I wouldn’t buy any shares in a real portfolio right now. The only thing is that it currently offer a 4% dividend yield

Goldman Sachs (NYSE: GS) -14.10%

Goldman Sachs has had its share of problems in 2010 but I think they are ready to bounce back. If I am lucky enough and they deliver strong results by the end of the year, I might see this stock going a little bit higher and cancel my loss from my first 2 picks L.

Vanguard Emerging Market ETF (NYSE: VWO) 11.27%

Can’t be bad everywhere, right? The emerging market showed some strength and this pick is now up by about 10%. This is a small consolation (I rather like Mike @ Money Smarts Blog picks with bear leveraged gold ETF ), but at least, I have one stock showing green on my sheet!

Here are the results from the stock picking contest of 2010: big winner so far: Dividend Growth Investor!

Intelligent Speculator	-7.86%
The Financial Blogger	-15.24%
Wild Investor	8.35%
Million Dollar Journey	-10.46%
Where Does All My Money Go	-2.90%
Four Pillars	-27.07%
Zach Stocks	0.84%
My Traders Journal	-1.31%
Dividend Growth Investor	21.34%
Bryan	0.49%
Chris	0.40%
Matt	-1.76%
1stMillion	-9.30%

I actually like what is going on in the markets right now as I believe there is a huge opportunity for us to make money over the long term. While many investors thing the stock market is sick, I’d say it is just another rough patch to ignore.

The good side of things is that our Canadian dollar is still pretty strong (fluctuating between $0.95 and $1.00 US) and the US stock market hasn’t recovered as it should have (keep reading to know why).

This should give you 2 great reasons to think about investing in the US stock market:

Our dollar is strong

The fact that our dollar is strong compared to US money is really good news. We presently benefit from the good reputation of our economy (thanks to our Canadian Banks ). This brings more foreign investors to invest in Canada (either in our stock market or via Canadian bonds, government and corporate). We also host several major players in the oil and gold industries. Since China and India are still very hungry for these resources, our Canadian dollar has remained at a higher level than usual.

However, I think that once the concerns about the US economy are resolved, our dollar will start going down again. The US has a more diversified economy and was built with strong companies with a lot a liquidity and positive cash flows. Sooner or later, this will have an impact on their economy and it will recover from their housing-bubble-credit-swap mess.

In the meantime, it gives you a great opportunity to convert strong Canadian dollars into weak US dollars and buy US stocks. And this leads me to my second point:

US Stocks are being ignored

Since the credit crunch in 2008, there is a cloud of fear over the head of the US stock market. People seem to think that all companies have the H1N1 virus and we best kept our distance from them.

After further analysis, I have realized there are several interesting plays to make on the stock market. If you just take into consideration their PE ratios, you will notice that some US stocks are just ignored by most investors:

As you can see, you can probably find great investing opportunities with some companies providing serious dividend payouts as well. If you are looking for a long term investment such as inside an RRSP, I think that some US investments couldn’t hurt .

If you are not completely decided as to which stocks to buy, you can also consider US index ETFs or mutual funds (you can look at this article for more small portfolio investment ideas: investing a $1,000 or less). But take one that is not hedged against the currency to make sure to benefit from the future Canadian dollar drop (it may happen faster than we think if you agree with the idea that we are about to burst the Canadian housing bubble soon…).

Image credit

For years, any top dividend list has had many income trusts at the very top. If you look at the most recent one that was published, the top 5 stocks were in fact trust units. But the Canadian government announced changes to this structure that will affect those companies as well as the investors involved in these funds. We have received many comments and emails about Trust Units, the upcoming changes and how it will impact the investments in those companies. So we did some research and will do our best to answer these and additional questions as well.

What are Income Trusts?

Income trusts are capital structures that are designed to pass on cash flows to their investors. This differs from traditional businesses because corporations generally do not keep much capital.  Income trusts also avoid taxation since the taxes are paid by the investors who will receive the dividends. Because of that structure, trust units generally pay high dividends. They avoid the “double taxation” that affects almost any other company. Double taxation represents the fact that a company will be taxed on its profits and then the individual receiving the dividend will also pay income tax on those gains. They were created mainly to spur growth in Canada’s energy sector as this helped give shareholders an incentive to invest in these funds. Since the Federal government saw natural resources as an important driver for Canada’s economy, getting capital investments was a key to accelerating the development. It’s safe to say that these measures have been a huge success. Not only did these funds attract capital but many other companies realized they could increase their company’s value by 15-20% simply by converting to an Income Trust.

What is happening to these trust units?

Because of the favourable tax treatment, an increasing number of Canadian corporations started converting their structures to become “Income Trusts”. This of course had a major impact on the revenues of the Canadian government as it was an efficient way to diminish taxes paid out. That attracted attention from the government. But when BCE, one of largest telecommunications companies in Canada announced its intention to convert, it became too much for the government. Finance minister John Flaherty announced changes in the treatments of trust units that would be rolled out over 4 years. These changes applied to any company that became a trust unit after 2007 but others had 4 years to adapt to the new rules. As the January 1st 2011 deadline gets closer, many of the Income Trusts are converting to more traditional structures.

How big of a problem were these Income Trusts?

In 2002, 79% of the money raised in IPOs in Canada was for Income Trusts. All of these corporations would end up paying little to no taxes to the federal government. It is easy to understand why this could not continue for very long. The federal government estimated it had lost $300 million in the previous year in taxes and the amount lost by provincial governments was similar.

Are the changes a mistake by Ottawa?

Of course many would say that they are but in the end, every Canadian would have been affected if the government had left the rules as is. With larger companies such as Air Canada & BCE converting, the government was going to receive less income and would need to add or increase other taxes to compensate. In my opinion, this was not a mistake. It’s sad for all of us Income Trust investors but still right.

Are all trusts affected by these changes?

No, real estate income trusts and mutual fund income trusts are not affected.

Do all trusts have to convert into a traditional structure?

No, they can remain as is. The main objective of these changes is to eliminate the tax benefits. Thus, income sent out to shareholders will be taxed at a 34% rate (31.5% starting in 2011) at the corporate level. Individuals will also be eligible for dividend tax credits, which is the same as with regular dividends. Many income trusts have confirmed they would remain in that structure.

Will the dividends change?

It really depends on each corporation. In general, corporations are simply reducing their payout to account for these taxes. For example, Daylight Energy Ltd (DAY-U) recently convered into a non Income Trust, its new ticker is DAY. It also reduced its payout from 0.08$ to 0.05$ per month. But is far from the majority. Of the 33 trusts that initially announced they would convert into a traditional corporation, 23 confirmed they would not diminish their payouts.

Will the prices of these securities dip?

That is very unlikely. Why? Because the rules are known and most of these securities already have the new rules priced in. In the month following the announcements, the trust index dropped by 17.8%. That is when it was dangerous to hold them. These days, you will simply see your monthly inflows take a hit.

Is there anything good for the Income Trusts?

Yes, it is far from being terrible news. One of the reasons why many income trusts converted into a corporation early is that as Income Trusts, they were very restricted when they wanted to issue shares. That made it difficult to increase their size even when good opportunities existed. As corporations, the trusts will have more flexibility.

What do I need to do as a shareholder?

Nothing. No matter if the trust unit converts or not, you can hold on to that security. The corporation is the one that needs to take action to pay the proper amount of taxes.

Conclusion

In conclusion, you should expect the dividends from these corporations to drop when the new rules take effect or earlier if the company changes to a traditional model. However, the stock price should not be affected.

image credit

We are currently finishing our Market review for the month of June along with our dividend stock review. They will be both available in our next newsletter (to be sent next week). Make sure to register (in the right column) if you want to receive update on the market and dividend stock review.

Here are the Ex-Dividend date, dividend yield and ytd of the TSX as of this morning :

Ticker	Name	Price	Dividend Yield	Return MTD
YLO-U	Yellow Pages Income Fund	5.94	13.47	-3.33
ERF-U	Enerplus Resources Fund	22.94	9.42	-0.52
PWT-U	Penn West Energy Trust	20.51	8.78	0.38
COS-U	Canadian Oil Sands Trust	26.8	7.46	-4.11
AET-U	ARC Energy Trust	19.99	6	-4.34
TA	TransAlta Corp	19.74	5.88	-5.14
BCE	BCE Inc	31	5.61	-0.94
CM	Canadian Imperial Bank of Commerce/Canada	66.05	5.27	-7.92
SLF	Sun Life Financial Inc	28.17	5.11	-8.54
T	TELUS Corp	40.47	4.94	3.64
BMO	Bank of Montreal	57.87	4.84	-8.36
HSE	Husky Energy Inc	25.54	4.7	-2.22
POW	Power Corp of Canada/Canada	25.51	4.55	-5.58
NA	National Bank of Canada	55	4.51	-3.79
SJR/B	Shaw Communications Inc	19.57	4.5	1.67
TRP	TransCanada Corp	35.93	4.45	3.43
FTS	Fortis Inc/Canada	27.16	4.12	-1.67
BNS	Bank of Nova Scotia	48.35	4.05	-3.9
RY	Royal Bank of Canada	50.91	3.93	-7.57
RCI/B	Rogers Communications Inc	34.74	3.68	-5.57
TD	Toronto-Dominion Bank/The	68.51	3.56	-3.25
ENB	Enbridge Inc	49.47	3.44	3.19
MFC	Manulife Financial Corp	15.41	3.37	-13.57
TRI	Thomson Reuters Corp	38.34	3.13	2.93
CVE	Cenovus Energy Inc	27.46	2.91	-4.97
SC	Shoppers Drug Mart Corp	33	2.73	-7.51
ECA	EnCana Corp	32.45	2.56	-3.7
BAM/A	Brookfield Asset Management Inc	23.46	2.34	-7.09
L	Loblaw Cos Ltd	38.51	2.18	-1.04
BBD/B	Bombardier Inc	4.99	2	3.31
WN	George Weston Ltd	72.1	2	-2.97
BVF	Biovail Corp	20.02	1.99	30.25
CP	Canadian Pacific Railway Ltd	56.75	1.9	-1.99
FM	First Quantum Minerals Ltd	54.22	1.89	-2.92
SAP	Saputo Inc	30.69	1.89	4.53
CNR	Canadian National Railway Co	60.56	1.78	-0.53
MRU/A	Metro Inc	41.9	1.62	-1.87
SNC	SNC-Lavalin Group Inc	42.44	1.6	-7.8
TLM	Talisman Energy Inc	16.06	1.56	-9.78
CTC/A	Canadian Tire Corp Ltd	54.93	1.53	-5.99
THI	Tim Hortons Inc	34.04	1.53	-1.45
SU	Suncor Energy Inc	31.11	1.29	-5.76
TCK/B	Teck Resources Ltd	31.61	1.27	-11.84
CCO	Cameco Corp	22.35	1.25	-10.62
IMO	Imperial Oil Ltd	38.73	1.14	-4.68
MG/A	Magna International Inc	68.41	1.11	-4.8
NXY	Nexen Inc	20.82	0.96	-9.47
ABX	Barrick Gold Corp	45.95	0.91	2.52
CNQ	Canadian Natural Resources Ltd	34.94	0.86	-4.54
YRI	Yamana Gold Inc	10.34	0.6	-8.93
K	Kinross Gold Corp	17.3	0.59	-4.42
IMN	Inmet Mining Corp	42.72	0.47	-14.9
POT	Potash Corp of Saskatchewan Inc	90.91	0.47	-11.82
G	Goldcorp Inc	43.95	0.42	-4.24
IMG	IAMGOLD Corp	17.66	0.36	-1.45
AEM	Agnico-Eagle Mines Ltd	61.07	0.3	-1.9
ELD	Eldorado Gold Corp	17.94	0.28	-0.55
AGU	Agrium Inc	52.37	0.22	-8.67
GIL	Gildan Activewear Inc	29.82	0	-5.66
RIM	Research In Motion Ltd	51.11	0	-20.44

Oh boy, oh boy, oh boy! This is not my year to make the right stock picks! See how things can go sideways even with good companies?

First: Goldman Sachs Lawsuit

What can you expect from a good financial stock when the company is being sued by the Federal government? Nothing but a severe plunge! While I still think that Goldman Sachs is a great company and that they will bounce back (I would buy more of them if I had liquidity right now!), I really picked the wrong time to choose it as a good investment pick in 2010

Second: Research In Motion Investors‘ Disappointment

While Investors were astonished by RIM for several years, they all seemed to turn their back on this amazing company and prefer Apple’s gadgets. I actually have an iPod and will probably buy an iPad eventually so I have nothing against Apple’s iDepartment. However, I still think that the best tool to work with is a Blackberry. The income and revenues are increasing but nothing seems to be enough for investors now that they have found their next flavour of the month!

Third: Manulife Going Down To Hell

I thought that the problems were over with Manulife and I had figured it was a good gamble for this year. Unfortunately, this is not the best pick either… investors seem to be reluctant to give Manulife credit for their operations… hopefully the wind will turn during summer time!

Fourth: Emerging Market On The Sideline

My best pick so far is also negative… man! It’s a bit depressing but I still have faith in emerging markets. They can surge at any moment and this is the kind of stock that can make me gain a few positions in our contest in no time.

So How Did It Go for the Others?

Take a look at the result so far at Q2: only 1 positive portfolio: Dividend Growth Investor at 6.39%!. You can click on each blog to view their comments about their stock pick experience so far this year:

Blog	Best Stock Picks for 2010	Ytd
Intelligent Speculator	UNG JJN SOHU GOOG	-19.06%
Wild Investor	BAC VALE CAT SLB	-7.60%
The Financial Blogger	RIM MFC GS VWO	-22.65%
Four Pillars	DZZ GLL DGZ HIG	-20.11%
Where Does All My Money Go	FUN HAT ADD CAR	-14.16%
Dividend Growth Investor	O KMP ED PM	6.39%
Million Dollar Journey	HE.TO MFC.TO CVE.TO QLT.TO	-23.65%
My Traders Journal	UUP DVY UCO SSO	-11.90%
Zach Stocks	BX AGO ICE SLV	-17.24%

Looking to trade other stocks ? Try these introduction videos about:

How to trade Crude

How to trade Futures

How to trade Stock

How to trade Forex

How to trade Gold

No April’s fool post today, just our stock picks contest Q1 results… I thought of writing something weird to make you laugh but didn’t come with something better than my Primerica post from last year… I promise to be original and come up with something good for next year

In the meantime, I can’t tell you how disappointed I am with my stock picks for 2010. I’m obviously not in a good position to date as many of my fellow bloggers are enjoying better returns. On a positive note, none of my stock picks are negative and I am really proud of this!

RIM is regaining investor confidence as they are showing better results of late and many industry analysts believe the best is yet to come from the Blackberry maker. I just can’t help it, I’m a sucker for this small phone. I consider it as my 3^rd child now

Manulife did a great job too and investors have started to think that investing in an insurance company is not a bad idea. The company was also wise enough to stay away from more bad news which bodes well for Q2.

Goldman Sachs is showing strong numbers but the US market is still shy. I guess we will have to wait until the second half of the year to see the stock climb.

Emerging markets are have gone sideways for a while with small fluctuations. International concerns regarding Dubai World, Greece, Portugal and Spain didn’t help more fragile economies either. Let’s hope to see some strong numbers coming out of China and India!

Here are the overall results for everybody. Since I had a few readers that were kind enough to contribute, I have decided to include their picks and returns in the second chart. If you want to learn more about other blogger’s stock picks, you just have to click on their name and you will go directly to their stock pick descriptions:

Blog	Best Stock Picks for 2010	Ytd
Intelligent Speculator	UNG JJN SOHU GOOG	-1.27%
Wild Investor	BAC VALE CAT SLB	9.30%
The Financial Blogger	RIM MFC GS VWO	2.87%
Four Pillars	DZZ GLL DGZ HIG	-1.01%
Where Does All My Money Go	FUN HAT ADD CAR	5.45%
Dividend Growth Investor	O KMP ED PM	9.58%
Million Dollar Journey	HE.TO MFC.TO CVE.TO QLT.TO	-11.83%
My Traders Journal	UUP DVY UCO SSO	5.78%
Zach Stocks	BX AGO ICE SLV	2.55%

And Congrats to Bryan who is beating everybody here with a marvelous 76%! (thx to ISCO which is up by 288%!)

Looking to trade other stocks ? Try these introduction videos about:

How to trade Crude

How to trade Futures

How to trade Stock

How to trade Forex

How to trade Gold

A few numbers on the Primerica IPO

Shares are deemed to be offered at a price range between $12 to $14 at the beginning.

At the middle of this price range, Primerica stocks would sell at 6.74 times earnings.

The US median is 9.52 times, so it’s 29% less.

Its per share income as of 2009 would be $1.93.

Primerica (owned by Citigroup) hopes to raise 252M$ today with its first IPO since they were bought by Citi.

Primerica is selling 24% of the company today. So the control will remain in the hands of Citigroup.

Primerica reported an income of 495M$ in 2009 as its revenue rebounded after taking a plunge of 72% back in 2008.

My Opinion on Primerica, the stock, not the business opportunity

I actually think that Primerica will sell at the opening for a very reasonable price and it could be interesting to see how the stock will fluctuate throughout the year. At $13, I would have probably considered it for our 2010 stock picking contest (update tomorrow!).

It seems to be a solid company based on a huge, humongous, incredibly large number of salesmen (more than 100,000!). Since people will always need insurance, good or bad, insurance reps should continue to make a  good buck down the road.

How can I buy Primerica Stock?

Well, first you need a brokerage account and then, you need to know what the Primerica ticker is… drum roll……

Primerica Ticker: PRI

That’s it! You are set to buy a few shares of Primerica!

Will you buy Primerica stock?

Hey, I want to know if you want to jump in the boat with me? I am seriously thinking of giving it a try, any thoughts?

Looking to trade other stocks ? Try these introduction videos about:

How to trade Crude

How to trade Futures

How to trade Stock

How to trade Forex

How to trade Gold

As we do every month, here is the TSX 60 dividend yield and ex-dividend date for March:

Dividends issued by Canadian Banks should be used to cover the inflation, most bank stocks offer a much interesting dividend yield than inflation! We have CIBC (CM: 5.45%) and BMO (BMO: 5.38%) offering over 5% and National Bank (NA: 4.39%) and Scotia Bank (BNS: 4.37%) offering more than 4%. Those picks would be great if you are trying to build a dividend portfolio .

Even after a dividend cut in late 2009, Manulife still offers a 2.66% dividend yield. I wish they can pick up in 2010 so it can help me with my 2010 best stock picks contest .

So here is the chart of the TSX 60 dividend yield and ex-dividend date:

Ticker	Name	PRICE	DIVIDEND YIELD	EX-DATE
YLO-U	Yellow Pages Income Fund	5.25	15.25	2/24/2010
PWT-U	Penn West Energy Trust	17.61	10.22	2/24/2010
ERF-U	Enerplus Resources Fund	22.69	9.52	2/8/2010
BCE	BCE Inc	27.47	6.33	3/11/2010
AET-U	ARC Energy Trust	19.8	6.06	2/24/2010
T	TELUS Corp	33.13	5.73	3/9/2010
CM	Canadian Imperial Bank of Commerce/Canad	63.9	5.45	3/24/2010
BMO	Bank of Montreal	52	5.38	4/28/2010
TA	TransAlta Corp	22.26	5.21	2/25/2010
COS-U	Canadian Oil Sands Trust	27.74	5.05	2/16/2010
SLF	Sun Life Financial Inc	31.23	4.61	2/22/2010
HSE	Husky Energy Inc	26.6	4.51	2/24/2010
TRP	TransCanada Corp	34.17	4.45	3/24/2010
SJR/B	Shaw Communications Inc	19.9	4.42	2/10/2010
NA	National Bank of Canada	56.51	4.39	3/23/2010
BNS	Bank of Nova Scotia	44.83	4.37	3/26/2010
POW	Power Corp of Canada/Canada	28.06	4.13	3/19/2010
FTS	Fortis Inc/Canada	27.7	4.04	2/3/2010
TD	Toronto-Dominion Bank/The	63	3.87	3/31/2010
RY	Royal Bank of Canada	52.28	3.83	4/21/2010
ENB	Enbridge Inc	46.41	3.66	2/10/2010
RCI/B	Rogers Communications Inc	33.36	3.48	3/2/2010
CVE	Cenovus Energy Inc	24.71	3.47	***
TRI	Thomson Reuters Corp	35.71	3.30	3/3/2010
MFC	Manulife Financial Corp	19.54	2.66	2/19/2010
ECA	EnCana Corp	32.7	2.62	3/12/2010
BAM/A	Brookfield Asset Management Inc	21.55	2.57	4/28/2010
BVF	Biovail Corp	15.6	2.44	3/8/2010
L	Loblaw Cos Ltd	35.09	2.39	3/12/2010
WN	George Weston Ltd	68.9	2.09	3/12/2010
SAP	Saputo Inc	28.55	2.03	3/4/2010
CNR	Canadian National Railway Co	53.32	2.03	3/8/2010
SC	Shoppers Drug Mart Corp	42.55	2.02	3/24/2010
BBD/B	Bombardier Inc	5.04	1.98	4/14/2010
CP	Canadian Pacific Railway Ltd	50.48	1.96	3/24/2010
MRU/A	Metro Inc	39.07	1.74	2/10/2010
CTC/A	Canadian Tire Corp Ltd	53.48	1.57	4/28/2010
THI	Tim Hortons Inc	30.77	1.30	3/1/2010
TLM	Talisman Energy Inc	17.69	1.27	6/2/2010
SNC	SNC-Lavalin Group Inc	48.97	1.23	3/17/2010
SU	Suncor Energy Inc	33.76	1.18	2/26/2010
ABX	Barrick Gold Corp	37.12	1.14	5/26/2010
IMO	Imperial Oil Ltd	38.44	1.04	2/24/2010
NXY	Nexen Inc	23.41	0.85	3/3/2010
CCO	Cameco Corp	28.9	0.83	3/29/2010
K	Kinross Gold Corp	17.31	0.62	3/19/2010
CNQ	Canadian Natural Resources Ltd	68.25	0.62	3/10/2010
G	Goldcorp Inc	36.24	0.52	2/9/2010
IMG	IAMGOLD Corp	14.09	0.45	12/20/2010
POT	Potash Corp of Saskatchewan Inc	105.92	0.40	4/13/2010
YRI	Yamana Gold Inc	10.77	0.39	3/29/2010
IMN	Inmet Mining Corp	54.15	0.37	5/25/2010
AEM	Agnico-Eagle Mines Ltd	54.05	0.36	3/10/2010
FM	First Quantum Minerals Ltd	77.55	0.21	4/7/2010
AGU	Agrium Inc	60.14	0.19	6/9/2010
MG/A	Magna International Inc	58.82	-
TCK/B	Teck Resources Ltd	35.01	-
ELD	Eldorado Gold Corp	12.7	-
GIL	Gildan Activewear Inc	22.93	-
RIM	Research In Motion Ltd	67.47	-

What is a protective put?

This strategy involves holding shares of a specific company, index or basket of stocks and also holding a put option on the underlying position. This put option will make money if the stock(s) lose value and becomes a ‘hedge’, that will be able to offset a loss on the holding. It is in fact a type of insurance in case of a declrease in value for your position.

When can it be used?

It can be used in many circumstances. The general reasoning is that the investor wants to keep his stock and is concerned about a possible decline in the stock. There could be a few reasons behind this situation. Here are some examples:

• Belief that the market will rise but that there is a smaller probability of a major decline from which he wants to be protected
• The investor believes there is a good chance that the stock will decline but does not want to sell them because it will create capital gain and thus important tax implication.
• The investor wants to keep the income flow from dividends without assuming too much risk if the stock price declines
• An investor holds some stock that he believes in but he determines a maximum amount he can afford or is willing to lose given a decline.
• An investor wants to protect against downside risk without selling his entire portfolio of stock (thus incurring major transaction costs)

In all of these cases, the protective put would be a very good strategy for the investor involved.

How do I determine what put to buy?

If you want to implement this strategy on a specific stock or portfolio, then you can simply buy a put option with that underlying stock. However, if you hold many stocks in your portfolio, it might be more effective (although imperfect) to hedge through one or two puts. For example, if your portfolio is heavily invested in financials as well as in the general stock market, you could buy put options on XLF (financials) and SPY (S&P500).  This would give you protection on these broader indices.

Positive impacts

Depending on the reason behind your trade, the protective put can give you upside potential if your stocks climb and a limited loss if the stocks decline.

Negative impacts & risk involved

Like any other insurance, there is a cost associated to this strategy. The cost of course is the premium that you are paying when buying this insurance.

Earlier, I also discussed how you could hedge your entire portfolio with one or two put options. The risk involved is mainly if something “exceptional” happens to one of those stocks in your portfolio. If the company was involved in a fraud or had negative earnings while the industry in generally was still performing, the ‘protective put’ would not be of much help.

Conclusion

I believe that as a portfolio grows, the potential use of a protective put becomes greater as there are many different uses for it. There are many different aspects to consider before entering into this strategy but it can be a very effective and cost efficient way of hedging downside risk for a limited period of time.

Please feel free to ask any questions regarding this strategy or options in general:)