Investing

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

    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

    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

    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

    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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