Ultimate Option Strategies
Buying Put Options Helps Protect Your Stock Portfolio
No matter what the current market conditions,
it is always a good idea to be ready for a sudden pullback.
How can you do this? By buying put options.
A put option profits if a stock declines in price. It is almost like having an insurance policy on your investments.
New option traders might be surprised that you can make money if a stock goes down -- but you can! It‘s just one of the great things about options.
A put option gives its owner the right to sell the underlying stock at a specified price. When you buy a put option you want the stock price to fall. Even if it falls to zero, your put option gives you the right to sell it at the specified price.
For example, in October 1987 option trading was temporarily suspended due to “fast market” conditions. That is when put owners had to actually buy and then sell the stock to collect their profits.
The mechanics of such a situation are this: Let’s say you buy a put option that gives you the right to sell the underlying stock at a price of 30, and the stock falls to 20. You can buy the stock at 20, and then use your put option to sell it at 30, for a 10-point profit.
Fortunately, that gain will also be reflected in the price of the put option. So most of the time you won’t have to buy and then sell the stock. You can simply sell the put back to your brokerage to collect your profits.
Put options also have another valuable function. You can use them to shelter your stock portfolio from a market decline.
In this day and age computer-driven trading and push-button money transfers can cause sharp sell-offs almost overnight. In such a scenario most investors will be unable to get their money out in time.
So it pays to have some "portfolio insurance" to guard against this kind of collapse.
Buying a put option is as easy as buying a call option.
Our weekly e-mail report, Ultimate Options Strategies, offers detailed trading advice and specific buy/sell advice for puts, calls, LEAPs and more.
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