9 Minute Read

Tackle Today: The Protective Put

December 10, 2021

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« Pros & Cons. »


One way to defend against the vicious volatility in the stock market is to buy a put. Because a put contract locks in the right to sell 100 shares of stock at a set price, it limits your risk. Let’s say I own XYZ stock at $100 and purchase the $90 put for $3. I now have the right to sell the stock for $90, thus capping my loss potential at $10 ($100 – $90), or 10% of the stock’s value. Of course, I had to pay $3 for the put, which increases the max loss to $13. 

The pro of using puts is this: you define and limit your downside risk, thus removing much of the emotion that accompanies a bear market. 

The con is the same as any other insurance product: they cost money. In the example above, we paid $3 for the put and thus need to make $3 on the stock to break even. Most of the time, stocks don’t crash. It can be hard to keep paying for an expensive insurance policy when you don’t know when or if you’ll need it. 

Some traders offset the cost by selling covered calls. Others try to time the market and only buy insurance when they think they need it. Both approaches have merit. Consider this your nudge to experiment with both. 


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