Option Trading Tips for Anxious Investors: Try an Apple (NASDAQ:AAPL) Put
By Schaeffer's Investment Research Oct 01, 2012 10:20 am
Expert tips, tricks, and strategies to protect your portfolio.
Tip No. 2: Be your own one-person"plunge-protection team."
- Taking the notion of the protective put one step further, you can hedge against a broader-market crash by purchasing puts on stock indexes. It's the hedging equivalent of one-stop shopping, but keep in mind this method works best if you're primarily invested in big-cap, low-beta blue chips.
- A slightly more liquid alternative would be to buy put options on equity-based exchange-traded funds (ETFs). Depending upon the makeup of your portfolio, you may want to consider the very broad SPDR S&P 500 ETF (NYSEARCA:SPY), the tech-based PowerShares QQQ Trust (NASDAQ:QQQ), the Consumer Discretionary Select Sector SPDR Fund (NYSEARCA:XLY) -- or any of the dozens of other sector-specific ETFs available on the market. In fact, as Todd Salamone explains, hedge funds frequently use ETF puts to shield against stock-related losses.
- So maybe you should have bought that protective put three months ago... but you didn't, and that stock you had such high hopes for got dragged lower by a widespread selling spree. What now? To repair your losses on a trade gone wrong, you can use call options as a retroactive Band-Aid.
- Experienced options players don't have to limit themselves to straightforward put purchases. If you're looking to up your hedging game to the next level, why not flex your derivatives expertise by executing a put butterfly spread?
No positions in stocks mentioned.