Using Put Options to Protect Your Portfolio

As options are a fairly sophisticated method of investing/speculating, I rarely write about them as I’m a big believer in sticking with the basics.  However, with the expectation of some sort of market correction between now and October 2010, I’ve had thoughts on ways to hedge a portfolio to reduce the potential for loss.

One way to protect a portfolio is to purchase insurance in the form of put options.  What is a put option?  If you recall our detailed series on how call options work, put options are the opposite.  Where buying a call option allows an investor the option to purchase a stock at a particular strike price, a put option allows the investor the option to sell a stock at a particular strike price.  Basically, it allows the investor to bet that the underlying asset is going to depreciate.  Read More…

Replies to this Post

  1. Dontae says:

    I’ve tired considering options before but that arena seems way out of my league like the Forex market. I’ll stick to etf funds.

  2. Yogi D says:

    Funny thing is out-of-the-money options, as they are called, are sucker bets and new traders almost always jump all over them in hordes for their limited risk and high leverage features.

  3. Alfredo K says:

    Time decay of options the reason traders lose money. Option contracts last for a certain time and so every day that passes the options actually lose money. So timing and keeping a watchful eye is key. Beginners beware!

  4. Brennen says:

    The option exchange market is a dangeorous thing for beginners and should be avoided at all costs. I remember trying them when i was new to investing and it was a total disaster. Gladly i only lost a few thousand and not more. Ironically i’ve lost 10 times that while experienced.

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