Volatility is dead and stocks are racking up record highs daily. In a world where everything is awesome why should I be a downer and plant the seed of protection in your mind?

I’ll tell you why.

Because I’ve seen this movie before and I know how it ends. It may not be fire and brimstone, but a correction is always looming somewhere on the horizon. Plus, the time to prepare is when it feels like you don’t need to.

And right now it feels like buying puts is the dumbest idea on the board. But that doesn’t mean it doesn’t have merit.

Let’s say you’ve been enjoying the market’s bullish march and want to lay some of your profits into some good old fashion put protection. Do you want to know how you can reduce the cost?

Do a bear put instead. Here’s how.

Puts, on the Cheap

The S&P 500 ETF (SPY) currently goes for $312. June 2020 options provide a good seven months of protection. And if we play with the 10% OTM strike of $281 the cost will only run us $6.58 which is just 2.1% of the price of 100 shares of SPY or the equivalent investment ($31,200) in a stock portfolio.

That sounds cheap to me. Chalk it up to the VIX flirting with 10.

But you can drop the cost even further if you don’t think the market will fall more than 30%. Said another way, if you’re willing to cap your protection once the market has crashed 30%, you can cut the cost by about $1.20.

Just sell the Jun $225 put against the $281 put that you’re buying. That creates a Jun $281/$225 bear put spread for a net debit of $5.38.

The most obvious drawback to using bear puts over long puts is that they cap your gains if a garden variety correction turns into a flesh-eating bear. Fortunately, those don’t happen very often. On the positive side, the lower cost of the bear put makes it an easier trade to enter than long puts.

Gino and I will be discussing buying put spreads in tonight’s Coaches Show. Join us for some additional insights. It’s going to be a blast!

Legal Disclaimer

Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.

All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.