Friday, August 22, 2014

Puts are very underrated

Puts are very underrated.  The rap on them:  "they're so expensive."

They are.  But like a lot of things in life (not all), the dictum applies:  "you get what you pay for."

If you're persuaded, like some, that the Fed will pave the way to SP 2500, no sweat, you won't feel the need for any costly insurance.  But if the chorus of cautious voices has soaked through your hair, scalp and skull, and is now resident inside your gray matter, and you're like to be able to sleep soundly at night:  consider puts.

Let's take mighty Apple for example.  This past month, with the stock at 95 and change, the Jan. ATM (at-the-money) puts were going for something like 6.50.  (I am doing this, more or less, from memory.)  So, worst case, if Apple went to 0 (how could that happen?), or 50, or 80, max loss is capped at 6.50 (and change).

Let's head north.  Say the stock goes to 200 (how could that happen?).  You're out the insurance tab, and pocket 105.  Not bad.

For your 6.50 put tab, you get a 50something delta, quantified loss level.

What happened next?  Apple went to 100.  The strategist made 5 or so on the stock, lost 2.70 or so on the put, net gain, 2.30 on 6.50 risk, or 35%.   (And if AAPL reaches that magical 125 some pundits talk up, there's still another 25 points to go.....)

Without the put, the risk was 95 on the stock, made 5 on the stock, so 5/95, or 5.2%.

Additionally, will some profit under the belt, there are some adjustment options available, but that's beyond the scope of today's musing.

Leverage.  ROI.  Peace of mind.

Not to mention dividend capture, ability to sell calls (or puts) against, and countless other options machinations.

There's a bit more to this, our method, e.g. fundamentals, timing. options analysis.  For more, give a look to our book, Option Wizard® Trading Method.

In today's world of Putin, Ukraine, ISIS, Ebola --- and the unknown unknown that's coming down the pike next to hit us all on the blind side, puts are very underrated.

I'm just sayin'.........