Using Puts To Make Money In A Bear Market

Obviously no one knows if the market is at the beginning of a new bear market phase for the stock market, but one thing is for sure: if you would like to hedge yourself against the possibility that July 2011 marked the beginning of a downtrend, stock options–specifically put options–offer many opportunities for protecting yourself against losses. In this article Stock Options Explained will cover the simplest one of all: simply buying puts on stocks that you own.

Investors and short-term traders often attempt to use the outright purchase of put options to make money in a bear market or to protect their stock investments against potential losses. Either way, one favorable aspect of purchasing puts is that your risk is Continue reading Using Puts To Make Money In A Bear Market

Put Options Explained

You can get put options explained to you in a couple of sentences, as in: a put option is an options contract that gives the buyer of the put the right to sell 100 shares (per contract) of the underlying security at a given price, by a specified date in the future. The put seller, on the other hand, assumes the obligation to buy 100 shares of the underlying stock at a given strike price, by a defined expiration date in the future.

You may have a pretty good understanding of stock options basics in both buying and selling call options, which in their simplest forms usually involve assuming risk through leverage when buying calls, and alternately, offer opportunity to reduce risk by hedging, when selling calls (also known as writing calls).

For some people though, buying and selling put options is a little harder to understand. After all, how can the put buyer sell 100 shares of something he does not own? How in turn can a put seller fulfill his obligation to buy 100 shares of stock that the put buyer does not own? In this post I’ll go over puts in such a way that even an options beginner can understand. Continue reading Put Options Explained

How A Protective Put Strategy Can Make You Money, And Help You Sleep

The last month or so the stock market has had a run-up of about 10% in terms of the S&P 500; the path wasn’t straight up, but still the rise has been quite impressive. If you are mostly long in your stock portfolio you are feeling some relief compared to the low point just before July 4th, 2010. This might be a good time to explain how a protective put strategy works, as something to consider if you are afraid that stocks may be headed down, at least temporarily, from here.

On this site you have had stock options explained to you in terms of using leverage to aggressively profit from a rise or fall in underlying stock, as well as having call and put options explained as ways to hedge existing positions, with safety as the goal.

You can use puts to protect gains that you may have in your portfolio, or more specifically profit from possible downside moves in stocks or ETF that you might own but do not wish to sell at this time. Reading the financial commentary right now, you’re hearing an awful lot about the possibility of a double dip recession, which would naturally be detrimental to your long stock positions. Buying, or going long, put options is a way to purchase some insurance for your portfolio, and though this ‘protective put’ strategy carries with it some risk, it can be put to good use just like buying insurance, because even if the events you fear do not occur, buying protective puts enable you to sleep better knowing that you have covered yourself, just in case. And, if the underlying stock should fall, the gains you see in the value of your puts will at least partially offset the paper losses you experience in your stock position.

The mechanics using this protective insurance are really quite simple: Continue reading How A Protective Put Strategy Can Make You Money, And Help You Sleep