Investing in the Stock Market always carries some inherent risk. However, I have discovered a method whereby you can invest in the NASDAQ Power Shares (Symbol QQQQ) for one year and be assured of retaining your principal. Let's say you believe that the next year will be a growth year for the NASDAQ, but you want to be sure you don't lose any money if you are wrong. Using this investment technique, the worst you can do is break even.
Things You Will NeedA Brokerage Account
Money to Invest
As an example, say you have an investment of $100,000 and you believe that the NASDAQ PowerShares (Symbol QQQQ) will rise over the next year. But if you are wrong, you still want to have the $100,000 at the end of the year. Here's how you can accomplish that.
The first thing you do is take $97,000 of the $100,000 and purchase a Certificate of Deposit (CD) that yields 3.1%. By the end of one year the interest accrued will be $3000, so you will have retained your $100,000 at year's end ($97,000 principal plus $3000 interest on the CD).
With the $3000 you have left over from the original $100,000, you purchase One Year Call Options on the QQQQ Power shares. Using today's market quotes, the QQQQ is trading for around $43, and a Call option 12 months out with a $40 strike price trades for around $5. So you can purchase six $40 Call Options for your $3000.
At the end of one year, if the QQQQ is below $40, the Options will be worthless. However, you still have your $100,000 after you cash in your CD.
Now, let's say the QQQQ rises 10% in a year, so the QQQQ shares will be trading for $47.30. Your six $40 Call Options will be worth $4380 (6 times $7.30), and you'll end up with $104,380, a gain of 4.38% with absolutely zero risk.
Further, if the QQQQ rises 20% in a year, the QQQQ shares will be trading for $51.60. Your six $40 Call Options will be worth $6960 (6 times $11.60), and you'll end up with $106,960, a gain of 6.96% with absolutely no risk.You can do the math for varying interest rates on CD's, other QQQQ growth Percentages, and for other QQQQ PowerShares Option Strike Prices. However, no matter what happens to the QQQQ, using this method you will never have less than your $100,000 original investment.
Tips & Warnings
Instead of investing in QQQQ, Purchasing Call Options on Exchange Traded Stocks is another way to use this technique and still eliminate risk.
No commissions were taken in consideration for these calculations.
The Author is not a licensed stock broker.