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