CBOE Chicago Board Options Exchange
CBOE org/CBOE Membership | CBSX Site | CFE Site | Int'l Sites | RMC Site | Careers | Contact   CBOE RSS Feeds
Bid Now
Weekly Strategy Discussion

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.

Related Topics
Bookmark this Page  Email This Page  Printer Friendly
 
Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (ODD). Copies of the ODD are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606. The information on this website is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current. Many of the matters discussed are subject to detailed rules, regulations, and statutory provisions which should be referred to for additional detail and are subject to changes that may not be reflected in the website information. No statement within the website should be construed as a recommendation to buy or sell a security or to provide investment advice. The inclusion of non-CBOE advertisements on the website should not be construed as an endorsement or an indication of the value of any product, service, or website. The Terms and Conditions govern use of this website and use of this website will be deemed acceptance of those Terms and Conditions.

CBOE.com Web Site/Browser Requirements