Want to reduce the risk of a stock position? You have two primary choices: sell calls or buy puts. In other words, you can deploy a covered call or a protective put. Today’s video compares and contrasts the two.

Notes

Long 100 shares of stock

Ways to reduce risk/handle a downturn

1) Proper position sizing

2) Adding short call (covered calls)

3) Buy puts (protective put)

Sell Calls (Covered Call)

Tagline: Mild protection

Pros:

1) Positive Theta

2) Higher probability of capturing a profit on that short call

3) Doesn’t cost any money

Cons:

1) Limit your profit potential.

2) You only got a little bit of protection

Buy Puts (Protective Put)

Right to sell stock at the strike price

Pros:

1) Limited Risk – Defined Risk

2) Unlimited Upside

Cons:

1) Negative Theta

2) Costs money

3) Raises your breakeven on the stock.

4) Reduces my probability of profit.

5) if you wait until the market is down significantly, then options are really expensive!

Read more Options Theory [FREE Content]

Every Thursday our resident options addict, Tyler Craig, will be at the helm to help you demystify derivatives and better understand what truly makes them tick. Options for beginners? Come this way, please. Enlightenment awaits.

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Options Theory: Covered Call Strike Selection & Rolling

Options Theory: Poor Boy’s Covered Call Best Practices

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Options Theory: Beware Analysts Bearing P/E Ratios

Options Theory: FOMO and Overbought Markets

Options Theory: How to Build a Put Calendar Spread

Options Theory: How ITM Covered Calls Work

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