In a bull market there's a good chance that a stock that you have picked, using some selection process, will increase in value. This is what the average stock picker does, they buy stocks then hope (and often pray) that they go up.
Statistically speaking the best way to make money is by trading with the trend. This is because in a bull market 15 out of 20 stocks will follow the trend and this will give you the best odds of making money. In the same way in a bear market it is also best not to try and fight the trend but to go with the flow and either sell all your stocks and go to cash, or short the market.
But what if you own some good stocks and don't want to sell when the market is clearly going down, or about to go down?. There are a couple of tactics that you can consider, both of which involve the use of options, CALL options and PUT options. There is the widely known strategy called Covered Calls, and the much lesser known one called the Married Put.
If the terms Call option, Put option, Covered Call and Married Put read like a foreign language then you absolutely have no business trading options, or even considering these strategies. This is because the number one rule for option traders is to get the best option trading education you can afford, before you start trading.
The Covered Call strategy involves selling call options against the stock the you already own, in 100 share blocks. If the stock goes down the call options lose their value and compensate you in part for the loss in the stock price. However if the stock goes down by more than about 3-5% then you will lose more money in the stock than gained using the call option.
As already mentioned the covered call system only has the potential to offer about 4-7% credit when the stock goes down. Stocks have been known to quickly lose anything from 10 to 30% in a matter of days or weeks and the covered call strategy offers little protection against this sort of loss.
The better solution to providing downside stock protection is the option strategy called the Married Put. As the name suggests the PUT that you buy is used to provide protection when the stock goes down because Put options increase in value when the stock decreases in value. The term married is used because the option that is selected has to be very compatible with the stock, in other words a good match, if the strategy is to work.
It is beyond the scope of this article to explain exactly which Put option to buy but the following parameters need to be considered:
1. What strike price is selected for the Put option
2. The price of the stock
3. Either in or out of the money Put options
4. How much option time you want to buy
The last point is very important because the Put options that you buy only have a limited life and you need to consider for how long you need the protection. The big advantage of the Married Put strategy over the Covered Call strategy is that if selected correctly it can provide 90-95% loss protection in the event of a large drop in the stock price.
The disadvantage of the Married Put strategy is that you have to buy the Put option, i.e. it costs you money, whereas the covered call is a net credit, whoever said option trading was easy?. Having said that I have not yet told you the full story of the Married Put, there's much more. There are ways of off setting the cost of the Put so that this strategy becomes self financing and can make heaps of money when the market is very volatile.
The general idea of the Collar Trade is to combine the covered call and married Put strategy into one, this is what is called the Collar Trade. In effect you put a collar around the stock, sell a call and buy a PUT. If you do this correctly most of the cost of the Put can be offset by the credit from the covered call so you can protect your valuable stock at almost no cost. Yes this is a great strategy which the general public is unfortunately very ignorant of, and most brokers don't understand.
Statistically speaking the best way to make money is by trading with the trend. This is because in a bull market 15 out of 20 stocks will follow the trend and this will give you the best odds of making money. In the same way in a bear market it is also best not to try and fight the trend but to go with the flow and either sell all your stocks and go to cash, or short the market.
But what if you own some good stocks and don't want to sell when the market is clearly going down, or about to go down?. There are a couple of tactics that you can consider, both of which involve the use of options, CALL options and PUT options. There is the widely known strategy called Covered Calls, and the much lesser known one called the Married Put.
If the terms Call option, Put option, Covered Call and Married Put read like a foreign language then you absolutely have no business trading options, or even considering these strategies. This is because the number one rule for option traders is to get the best option trading education you can afford, before you start trading.
The Covered Call strategy involves selling call options against the stock the you already own, in 100 share blocks. If the stock goes down the call options lose their value and compensate you in part for the loss in the stock price. However if the stock goes down by more than about 3-5% then you will lose more money in the stock than gained using the call option.
As already mentioned the covered call system only has the potential to offer about 4-7% credit when the stock goes down. Stocks have been known to quickly lose anything from 10 to 30% in a matter of days or weeks and the covered call strategy offers little protection against this sort of loss.
The better solution to providing downside stock protection is the option strategy called the Married Put. As the name suggests the PUT that you buy is used to provide protection when the stock goes down because Put options increase in value when the stock decreases in value. The term married is used because the option that is selected has to be very compatible with the stock, in other words a good match, if the strategy is to work.
It is beyond the scope of this article to explain exactly which Put option to buy but the following parameters need to be considered:
1. What strike price is selected for the Put option
2. The price of the stock
3. Either in or out of the money Put options
4. How much option time you want to buy
The last point is very important because the Put options that you buy only have a limited life and you need to consider for how long you need the protection. The big advantage of the Married Put strategy over the Covered Call strategy is that if selected correctly it can provide 90-95% loss protection in the event of a large drop in the stock price.
The disadvantage of the Married Put strategy is that you have to buy the Put option, i.e. it costs you money, whereas the covered call is a net credit, whoever said option trading was easy?. Having said that I have not yet told you the full story of the Married Put, there's much more. There are ways of off setting the cost of the Put so that this strategy becomes self financing and can make heaps of money when the market is very volatile.
The general idea of the Collar Trade is to combine the covered call and married Put strategy into one, this is what is called the Collar Trade. In effect you put a collar around the stock, sell a call and buy a PUT. If you do this correctly most of the cost of the Put can be offset by the credit from the covered call so you can protect your valuable stock at almost no cost. Yes this is a great strategy which the general public is unfortunately very ignorant of, and most brokers don't understand.
About the Author:
James J. Dehoiver is an experianced options trader, his passion is to learn stock trading systems and master the best technical indicators for stock investors.
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