Insurance For Your Stocks

In past posts I covered the strategy of writing covered calls to reduce risk and raise income. This post I’m going to explain the call options sibling, put options. Where as call options give you the right to buy a stock at a certain price, put options will give you the right to sell your stock for a certain price (strike price) for a limited number of days.

Having a put option on a stock that is plunging could be your life jacket for survival in a financial ship wreck. You can also use puts to lock in profits. If you were lucky enough to purchase a stock that went from $24 to $40, you could purchase a put option with a $30 strike of price. This way you limit your downside to $30 but still have the opportunity to participate fully in any upside. So whats the problem, why doesn’t everyone rush out and buy put options, Well for one thing they can be very expensive. Unfortunately in times of chaos and volatility like we are experiencing now put options go up in price. Just like life insurance will be more costly if you have increased health risks. Of course the longer length of time you want your put options to cover the more expensive your puts will cost. Put option are best used when you are concerned about a short term down turn in the market, after all if you think the long term peospects for the company are not good you  should not be holding them in the first place.

If  you are interested in options ask your financial advisor to explain how they could help your portfolio. Option strategies are complex and not something that should be tried with out professional help or a great deal of experience. Another alternative to buying options could be to purchase a inverse ETF something I may write about in a future post.