The Weekly Strategy Discussion is designed to assist individuals in learning how
options work and in understanding various options strategies. Options involve risk and are not suitable
for all investors. The strategies discussed are for educational and illustrative purposes
only, and should not be construed as an endorsement, recommendation or solicitation to buy or
sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.
Example: You own 100 shares of XYZ stock at $51.50
Outlook: You are moderately bullish on XYZ stock but worried about a possible price decline in the near term.
Possible strategy: Buy one thirty-day 50 strike Put at $1.80
- Maximum Profit = Unlimited
- Maximum Loss = Stock Price + Cost of Put - Put Strike
(51.50 + 1.80)- 50 = 3.30
- Breakeven = Stock Price + Cost of Put
51.50 + 1.80 = 53.30
In Summary: The Protective Put can be an insurance policy for shares of stock you already own. The Put limits your downside risk while keeping your upside profit potential intact. The purchase of a Put gives you the right but not the obligation to sell shares of stock.