Hedging Strategy: Buying a Put and Buying a Stock ☔

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Trading strategy: Buying put options as an insurance policy. http://www.financial-spread-betting.com/ PLEASE LIKE AND SHARE THIS VIDEO SO WE CAN DO MORE! Buying a put as insurance. Buying the put option and buying the stock...let's see what the payoff is for different price points at expiry. Once thing we can do with buying options is to use it in conjunction with buying a stock or shorting a stock. In this example I'm going to explain some of the scenarios that could happen if we bought a stock and a put as an insurance policy.

Protective Put Strategy: Hedging Strategy
XYZ stock is trading at $50
A put option with a $50 strike that costs us $10.
If the stock price is $0 on expiry our put option is worth $50 (ignoring what we have paid for now) because on expiry we have the right to sell the contract at $50
If the stock price is $10 on expiry our put option is worth $40
..etc
If the stock price is $60 on expiry our put option is worthless.

Now let's analyse the overall effect on our stock and option positions if we held back. Your downside is always limited to the put premium you paid. So If you believe that a stock is highly volatile and carries big downside risks yet also has big upside potential you could buy the stock and put option together. The put limits your downside to the premium you paid. Prices Plunging? Buy A Put!

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