IBD Live Demo: Protecting Big Gains With A Put Option (11/10/20)

TL;DR

Learn how to hedge your stock position using put options and understand the factors to consider when choosing the right options.

Transcript

[Applause] pretend you own this and what what strike would you buy what what uh you know how far out let's give them a real world example okay so you want to first have plenty of time again when i first started doing this it was like oh i don't want to spend a lot of money so i'd buy cheap puts you get what you pay for you and and really when you'r... Read More

Key Insights

• 🦔 The cost of put options when hedging a stock includes the premium and the spread.
• ⌛ Time value decreases rapidly in the last month before expiration.
• 🧘 Buying put options with a 50 delta can help completely hedge a stock position.
• 🤑 Deeper in-the-money put options have higher deltas, allowing for more potential profit.
• 🦔 Hedging with put options is like insurance for short-term uncertainty in a stock.
• 🦔 Current market conditions, such as weakness or news events, can impact the decision to hedge.
• 🗯️ The right put option strike price can be chosen by considering the desired hedge and sizing requirements.

Questions & Answers

Q: What is the cost of put options when hedging a stock?

The cost of put options when hedging a stock includes both the premium and the cost of the spread when entering and exiting the trade.

Q: When does the time value of put options start accelerating and decreasing?

The time value of put options starts accelerating around 45 days, increases further at 30 days, and significantly decreases in the last month.

Q: How do you completely hedge a stock position with put options?

To completely hedge a stock position, buy put options with a 50 delta and buy twice as many shares short as you have long.

Q: Can you make more on put options than you lose on the stock position?

Yes, if the stock drops significantly, the delta of the put options increases, allowing you to make more on the put options than you lose on the stock position.

Summary & Key Takeaways

• When hedging a stock, the cost of the put option is not just the premium but also the cost of the spread in and out of the trade.

• The time value of put options starts accelerating around 45 days, picking up at 30 days and significantly decreasing in the last month.

• To completely hedge a stock position, buy put options with a 50 delta and buy twice as many shares short as you have long.