H there, I want to buy out of the money puts for a position I have in a stock (so I can limit my loss). However, I just want to make sure I understand it correctly. Unless I'm mistaken, puts (and calls) can only bought in multiple of 100. So if I only have 65 shares to "protect", it seems I will pay more for nothing (the same price as to protect 100 shares). At least if I need need to exercise my option. I'm right and is there a work around for this? My other question is about if I ever need to exercise my option. Assuming I would have 100 shares, I could them simply exercise my option. But since I only have 65 shares, I'm not even sure if I can exercise my option and how it will works. Can I only exercise my option for 65 shares? Again, assuming I would have 100 shares. Would it preferable to sell the shares and the put instead of exercising the option? From my understanding, I should be able to sell my put for the price difference between the share price and the strike price, right? Is this true only near the expiration date? Many thanks!
Sort of. In most cases, a single Put or Call options contract represents 100 shares. There are instances when a stock splits that a Put or Call may represent a different number, but that is an exception to the general rule. Well, yes and no. You of course lose the entire investment in the Put if the stock price does not drop below your strike price at expiration. But the extra protection could be a bonus if the price really drops, because you'd be protected beyond what your 65 shares would lose. If you wanted to exercise the Put, you could purchase 35 shares at market (bringing your ownership up to 100 shares) and then instruct your broker to exercise. This assumes that the market price of the shares is below your strike price. On exercise, you'd get the strike price paid for all of your share. An alternative would be to simply sell the Put, which (in really oversimplified terms) should grow in value as it surpasses the strike price. It sounds like in principle you understand correctly. The further away from expiration, the more "time value" remains in the Put and, thus, the greater the premium between the share price and the strike price. This all depends on your investment goals for the 65 shares. Do you still believe in the company? Did you buy it for the dividend? Did you buy it as a gamble and you'd rather just be out of the shares altogether?
Yes, I'm still long in the company but I want to protect my gain in case the market change direction or crash. I could use a stop order but I don't want to be kicked out of my position because of a pull back. So I'm considering a protective put. Now, I'm trying to determine what would be my best strategy for let says the next 2 years. Should I, - Buy a put option that expires in 2 years? - Buy a put option that expires in 1 years and buy a new when it expires? - Buy a put option that expires in 1 years and exchange it for a new one before it expire? I assume the best strategy depends of many factors like the share price in the future. It looks like I will have to read a lot more. However, all articles I can find don't talk about this aspect.
If your goal is to protect your gain AND you had already considered a stop order, then it sounds like holding the shares through any price dips is not a priority. As you stated, your priority is to protect your gains. Which would usually mean buying a Put as close to the money as possible. But the closer to the money and the longer the expiration term, the more expensive that insurance (the Put premium) gets. Which means you have to do the math of the various Put expirations, the cost of the premium, and your breakeven price before you even benefit from the Put protection. Somewhere in all that, you should find either (a) the sweet spot where you can live with the cost of the Put for the level of protection it offers, or (b) deciding that maybe you're better off selling your shares now and hoping for chance to rebuy lower (as opposed to watching the share price continue upwards after your sale), or (c) do nothing. I sometimes do Protective Puts, although more usually I'll pair with a Covered Call to pay for the Protective Put (this creates a position called a "collar"), and usually for a shorter time frame: 3 to 6 months out. Collars are really for when you *think* you know for certain the share price is going to collapse. In this 10 year bull market, I've not had much success with collars and have had to watch shares get called away (although for sure at a higher price than I would have gotten just selling the shares outright) or roll out the Covered Call to another 3 to 6 months. Hope this info helps!
Yes, it's really appreciated! Regarding my best strategy to protect my gain for many years. Here're the Expiration Date and the Premium (1st and 2nd column) for a put option with its strike at 80% of current share price. Now, if I divide the Premium by the number of days until expiration (third column), I get a premium per day (fourth column). From this, it's seems the option with the farthest expiration is a better choice. Another thing that I noticed is that if I have the 03-18-22 option (the second last in the list), I could sell it and buy the 06-17-22 option (the last one) for an additional $5.45 and add an extra 91 days of protection. Or $5.45 / 91 days = $0.06 per day. Which seems even more affordable. Does this make sense?
If I understand you correctly, 80% of current share price does not sound like much protection of current paper gains. For example, if your shares are priced today at $50 per share, are you looking at the 40 strike Puts to purchase as your protection? Or perhaps you are okay with 80% of current price because that still preserves a lot of your gains? It very well could be assuming no changes over the next two years. However, if your shares increase in value over the next two years, your 80% of current price protection will fall to 75%, then 70%, and so on. What if your shares rise another 20%? Will you be happy with your 2-year insurance then? In other words, 9 months from today, would you be tempted to purchase a new Protective Put to protect additional paper gains? In such a scenario, your per-day premium cost of a 2-year Put begins to go up. Conversely, what if your shares fall to the 81% level of the current share price, and you gain nothing for your protection with a Put so far out of the money. These are the risks you have to weigh. Another way to look at the expense of the Put is the maximum loss, measured as the purchase price minus the exercise price plus the option premium. You can level it out on a per-day basis like you did above in calculating the cost of purchasing the Put, but the bottom line is the more premium you pay, the further the share prices has to decline before you break even, much less realize any gain or, in the case of Protective Puts, begin to actually protect your paper gains. You probably now know there is a great deal of elasticity in the pricing of options with strikes very near or at the money (ATM). That is, there is often greater demand for ATM options, and this is reflected in the premium price. Another way of saying this is that the most expensive Protective Puts are shorter duration, ATM strikes; yet those are the very Puts that protect the bulk of your gains.
Thanks again for sharing this info. A lot of food for though! Regarding my my initial scenario, I was ok losing 20%. But I now consider ATM options. But there is something that doesn't quite add up when I compare maximum loss for different strikes... Here's a screenshot from Yahoo Finance for QQQ Dec 2022 puts. QQQ closed at 230.27. As you confirmed me, maximum loss is the purchase price minus the exercise price plus the option premium. So for the following strikes, I get the following maximum losses (I took the asking price for the option premium) 220: 230.27 - 220.00 + 25.84 = 36.11 230: 230.27 - 230.00 + 30.10 = 30.37 310: 230.27 - 310.00 + 83.00 = 3.27 Is my maximum loss really 3.27 for the 310 strike? That doesn't seem to make sense. I mean, I buy the shares for 230.27 and the puts for 83.00 for at total of 313.27 and I can sell the share for 310.00 any time before expiration for a lost of 3.00. No this doesn't make sense!
Ok, I got it... When buying puts deep in the money, you limit maximum loss even more but the share price has to increase a lot more before you start to make profit. I'm wondering if this would not be similar to only buying an out of the money call. [
Yes, I think you do have it. The profit/loss profile for an OTM call will look very similar to the Stock+ITM Put. Of course, an OTM call does nothing to protect downside erosion of gains you already made in the underlying stock's share price, which is why you consider a Protective Put in the first place.
Yeah, I will go for stock + ATM put. Regarding the best strategy for the term of the put, I still not clear for me. Because time-decay accelerate as expiration date approaches, I have the impression that it would be less expensive in the long-term to simply exchange long term put every few month than buying new short-term puts every few months. For example the premium for QQQ ITM puts that expire in approximately 3, 17 and 20 months are respectively $8, $18 and $19. Now let compare the cost of using short-term put and long-term put for 6 months. - You initially buy a 24 month puts for $19. - 3 mounts later, you sell the put (that has now 17 months left) for $18 and buy a new 20 month put for $19. It cost you 1$. - 3 mount later, you sell the put (that has now 17 months left) for $18. Total cost $2. If you buy 3 months put instead, you will need to buy them 2 time for a total cost of 2 x $8 = $16. As you adjust strike when you buy new short-term put, you can make the change adjustment when you exchange your long-term puts. Those scenario assume no change in the market but considering the cost difference between those 2 strategies, I have the impression that market you have to change drastically for the latter strategy to be more cost effective.
Yes, this is generally the case for most options. Ha ha, in theory, yes. But most of the kinds of market change you might be protecting your paper gains against are often unforeseen, drastic changes. Only in hindsight can we determine what would have been truly the most cost effective. Ergo, the "fun" in laying out an option strategy as a test of your future expectations. It's an old axiom of options trading: If you sell options, go for shorter term, higher premium Calls and Puts, putting that steep time decay slope to work for you; If you are a buyer, go for longer term so that you don't lose a lot of premium value to that time-decay drop off in the final months. As long as you keep an eye on your option positions, and make adjustments when necessary, you'll be fine. Your research has served you well!
You mean I should go short or long? I took a lot of risk in the last years that really paid off but I now need to play it safe. Initially, the solution was to diversify my investment including taking bounds but this is very boring and doesn't protect me from a market crash. So to keep my long position in APPL, AMZN, MSFT, FB and GOOG (that I will all sell and replace with QQQ so I would be much easier to manage the puts), I had this idea of taking puts. However, If I ever reach my maximum acceptable loss, I will need to get out of the market. I don't know what I would do but it will probably be very boring. Here are the premium and time before expiration for QQQ put ITM. $8 - 3 months $16 - 12 months $30 - 34 months So if I take short-term puts and the market goes side way, what I do when my puts expire? I take short-term puts again? If my maximum acceptable loss is $30, the market will definitely need to be bullish before the end of the year or I will be out of the market. If I take the long term puts, I will have at least 34 month before I'm out of the market. I'm not saying long-term would be better. I'm just trying to explain you my reasoning so maybe you could explain me where I'm wrong. Thanks again!!!!
I think what I was saying above is that I agree with your reasoning. That is, if you BUY options (either Puts or Calls), the generally-accepted wisdom is that the longer term options are easier to manage because you don't suffer as much time decay (this was one of the points in the article link you posted). If having insurance is important to you, and you are willing to spend [x] dollar amount per year for that protection, than your cost-benefit analysis of the longer term versus shorter term Puts looks reasonable to me. For the longer term Puts to work effectively, you simply have to monitor them. That is why I wrote: "As long as you keep an eye on your option positions, and make adjustments when necessary, you'll be fine." The "adjustments" would be exactly the scenario you described further above: if QQQ goes up, you might consider selling the Put and buying a new one at a higher strike that protects the higher-priced gains. Conversely, if QQQ goes flat for a long time, you'll want to monitor your time decay so that when it begins to accelerate you can sell it and buy a new longer term Put. I guess all I really mean is that Protective Puts can be very effective and relatively easy to manage, but they aren't buy-and-forget-about-it instruments. You'll need to watch them. Whatever Put you buy (long term versus short term), you should also "paper trade" the other Put. So if you buy the long term Put, also make note of the price of the shorter term Put you might have considered. And keep track of both so you can compare the real-world implementation costs of each strategy. So if you buy a 2 year Put, then also paper trade a 3 to 5 month Put at the same strike. If QQQ makes a sizable move (either up or down) during the next 3-5 months, compare the value of your 2-year Put against the 3-5 month Put. Maybe down the road you find a place in your strategy for a shorter term Put, OR perhaps you get good confirmatory data that the long term Put was the best way to go after all.
