The Protective Put Strategy can be adjusted to address the
particular lean that the stock owner has at a particular time.
(The term lean describes the stock owners perception of the
directional strength of the stock.)
At any given time, an investor could feel that a stock may go up
or down, a little or a lot, or just stay where it is. The
protective put is not a position you would put on if you feel
that the stock you own was going to consolidate for a while. You
would have a loss in the stagnant lean scenario since the stock
made no gain but you were out $1.00 for the purchase of the put.
However, the situation is different in a bullish lean scenario.
A stock that has the potential to rise quickly also has the
potential to fall just as quickly. A stock that has substantial
potential gain has an equal potential loss.
An investor choosing to buy a stock like this should have more
protection to the downside then a covered call can provide and
at the same time more allowance for a larger upside potential
than the covered call allows.
This is a perfect time to use the protective put strategy. The
purchase of an out-of-the-money put will be a relatively
inexpensive investment but will provide the kind of results that
will best fit a bullish lean.
You will have maximum downside protection with all the room you
need for your stocks potential run up. Of course, this comes at
a price. You must pay for the protection and freedom this
position can provide.
The protective put can also be used when you have a little
bearish lean on your stock. Lets say that you own a stock that
has taken a very nice run up. The stock has gotten to a point
where you think about possibly selling and taking your profits
but are afraid to because you feel it may still run up more and
you will not forgive yourself for getting out too early.
Instead of selling the stock and missing out on the continued
run, look into buying a put for protection. It will allow you to
continue your capital appreciation as the stock trades up while
limiting your loss to a fixed, known amount.
In cases such as this one, the purchase of an at-the-money or
slightly in-the-money put will ensure you get a good sale price
if the stock heads down and allows you ongoing profit if the
stock continues up.
Of course, if the stock stays still, you would lose the amount
of premium you spent on the put. If the stock goes up, it would
have to trade higher than the amount you spent on the put before
your long stocks upward movement starts to make you money
again. |
