DAY TRADING STRATEGIES: THE COMPLETE GUIDE WITH ALL THE ADVANCED TACTICS FOR STOCK AND OPTIONS TRADING STRATEGIES. FIND HERE THE TOOLS YOU WILL NEED TO INVEST IN THE FOREX MARKET. by ANDREW ELDER

Author:ANDREW ELDER [ELDER, ANDREW]
Language: eng
Format: epub
Published: 2020-08-10T00:00:00+00:00

Buying Put Options as Insurance

A put option gives you the right to sell shares of stock at a certain price. Suppose that you wanted to ensure your investment in Apple stock, and you had purchased 100 shares at $191 a share, for a total investment of $19,000. You are worried that the share price is going to drop and so you could buy a put option as a kind of insurance. Looking ahead, you see a put option with a $190 strike price for $4.10. So, you spend $410 and buy the put option.

Should the price of Apple shares suddenly tumble you could exercise your right under the put option to dispose of your shares by selling at the strike price to minimize your losses. Suppose you wake up one morning and the share price has dropped to $170 for some reason. Had you not bought the option you could have tried to get rid of your shares now and take a loss of $21 a share. But, since you bought the put option, you can sell your shares for $190 a share. That is a $1 loss since you purchased the shares at $191. However, you also have to take into account the premium paid for the put options contract, which was $4.10. So, your total loss would be $5.10 a share, but that is still less than the loss of $21 a share that you would have suffered selling the shares on the market at the $170 price. When investors buy stock and a put at the same time, it is called a married put.

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