$37K loss avoided - using 'married put' stock/options strategy
"....and the stock dropped (from $25) to as low as $10. I would hazard a guess that I would not be extremely pleased with myself if I allowed my $37,500 profit and then some to slip through my fingers. Presently, my stock sits at $12 and my puts sit at around $13. Added together I still have my $25."
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Note: this communication is from late 2006. In it, 'J' writes that the market fell "over 200 points in one day".
200 points... that's nothing! We saw 500 point rallies one day and an 800 point crash the next following the 'Lehman shock' in 2008 - not to mention the '2010 Flash Crash' that wiped virtually all the value from some individual stocks until the authorities took control of the markets and began to cancel trades.
Numbers on the DOW, S&P and Nasdaq do little to show the real carnage sometimes taking place in the crucible of individual stocks.
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You make a solid argument for buying "puts" as insurance. With much reluctance I came to the same conclusion some time back.
I owned 3,000 shares of a stock bought at $12.50. The company had a new, very promising product - just being released. It was a new company and wasn't optionable. In a few months the stock rose to near $25. Since it was highly volatile - it went up $1.90 one day and followed with a $1 correction the next day - I was reluctant to use stop-losses. An alternative answer came to me when the stock began selling options. I bought 30 put contracts (3,000 option-shares) with a strike-price of $25. (For those not too familiar with buying puts - this put allowed me to sell my stock at $25 regardless of the stock's market-price).
I didn't want to spend any of my gain in buying puts. If the stock kept rising, my put would expire worthless.
On the other hand, I had a gain of $37,500 (3,000 shares times $12.50) and the original purchase price of another $37,500 at risk, if the stock tanked. Should I take the money and run, doubling my investment? Should I sell the stock or should I not? I mainly bought the puts to settle this dilemma. As 'Sir Jester' picturesquely stated in another thread, "...Trader 'A' has a cup of coffee and wonders if it (the stock) will go up again." That's exactly what happened to me. I relaxed and had that second cup of coffee, despite the market falling over 200 points one day. In fact this trade became very boring. I can do without the excitement of risking money!
If the stock exceeded $25 I had more to gain, but it didn't! It made a rapid decline. The new product ran into some political problems, and the stock dropped as low as $10. I would hazard a guess that I would not be extremely pleased with myself if I allowed my $37,500 profit and then some to slip through my fingers.
Presently, my stock sits at $12 and my puts sit at around $13. Added together I still have my $25. If I give up on the stock, I'll have my broker exercise the puts and sell my stock for $25 per share. If I wish to hang on, hoping the political problems are solved, I may roll-down my puts -- sell the existing ones for near $13 (near $39,000) and buy 30 new put contracts at a strike-price of $12.50 for a dollar or so. This will allow me to claim my profit and protect the underlying stock from any further decline. If the price begins to climb again, I'll have another profit to consider.
Buying those puts worked for me!
Best regards. J.
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