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When it comes to successful trading, managing risk may be as important as stock selection. One of the most overlooked – and least understood – methods of managing risk is by using options. Randy Frederick, Schwab's Director of Derivatives, offers a three-part article offering practical risk management strategies using options.
Excerpt from Randy Frederick's article
Protective puts: Long stock position and long puts in equal quantity
Protective puts are often thought of as a kind of insurance policy. If you are holding a stock that might trend down in the short term but that you believe has favorable long-term prospects, a protective put may provide short-term protection against a downturn in your equity position. To illustrate the parallel with an insurance policy, let's compare a protective put to automobile insurance. Assume you drive a nice sports car worth about $72,000. If you wreck the car beyond repair and you have no insurance, you would incur a loss of $72,000 (less any salvage value of the car). This is a significant risk; most people probably would not own such an expensive car without some kind of insurance. To read the full article fill out the form on the right. |
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