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.
BUY PROTECTIVE PUT
Example: You are long shares of Panhandle Industries (PAN), currently at $48.50. Your cost basis is much lower. To hedge your profit buy a March 45 put at $3.00.
Outlook:Long-term bullish on PAN, nervous about the overall market over the next 6 months.
Possible strategy:Protective Put.
Hold 100 shares of PAN
Buy 1 March 45 put at 3.00
Net cost of 3.00 or $300.00.
*All values shown are at the time of expiration. Commissions and other fees not included
Stock Change
|
PAN @ expiration
|
Long 45 put value
|
Value of 100 shares PAN
|
Total Value
|
Cost of 45 put
|
Net Profit/(Loss)
|
+23.71%
|
60
|
$0.00
|
$6,000.00
|
$6,000.00
|
($300.00)
|
$850.00
|
+13.40%
|
55
|
$0.00
|
$5,500.00
|
$5,500.00
|
($300.00)
|
$350.00
|
+6.19%
|
51.50*
|
$0.00
|
$5,150.00
|
$5,150.00
|
($300.00)
|
$0.00
|
+/- 0.00%
|
48.50**
|
$0.00
|
$4,850.00
|
$4,850.00
|
($300.00)
|
($300.00)
|
-7.22%
|
45.00***
|
$0.00
|
$4,500.00
|
$4,500.00
|
($300.00)
|
($650.00)
|
-17.53%
|
40
|
$500.00
|
$4,000.00
|
$4,500.00
|
($300.00)
|
($650.00)
|
AT EXPIRATION: (03/20/09)
* Break-even:PAN at 51.50 (+6.19%)
** Unchanged:Loss of $300.00
*** Max Loss:$650.00 if PAN < or = 45 (- 7.22%)
Note: Maximum gain is theoretically unlimited. Profit and loss calculated from current price of PAN, not cost basis.
IN SHORT: Buy a protective put to maintain full upside potential on stock position (less cost of the put). Downside risk limited to $650.00 until the put's expiration.