Papale on Protective Put Strike Selection

Last week it seem 49ers coach Jim Harbaugh was almost traded to the Cleveland Browns.  Rumor has it he wanted more money and more power (what else in new).  I am not a student of the game in the same way our fearless leader Steve Lentz is, but I have never heard of a coach being traded.  Players, cards, coins, cigarettes in prison – yes.  But not a coach.  Anyway it seems that is off the table at least for now.  I wonder how he did at the combine?

When markets reach new highs there is a tendency to consider ways to protect against a selloff.  If you are long stock, a basic and effective way is to buy a put.  A put give the owner the right to sell a stock at a predetermined price within a predetermined time.  For example, if I own AAPL and I am a bit nervous I might buy a put to protect from a selloff.  The amount of protection and how long I am protected is based on the strike price and month of the put.  If I don’t want to lose more than 5% or so, with AAPL around $530, I would look to buy a put with a strike price of 500 or 505.

Remember, the more protection the higher the price.  And if I want to be protected going out to June I would want to buy the June 500 put, which will cost more than the April puts.  Like all insurance, more time of coverage and smaller deductable (more protection/less out of pocket) equals more cost.  There is no right or wrong here.  Each investor or trader must look at his or her own risk/reward scenario and make the choice most suited to their own individual situation.

 


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