That's why I still have all my puts in place to hedge my longs. BTW, I wanted to clarify a previous post where I commented on my strategy for buying puts.
I like to buy them about 10-20 points OTM because I am fundamentally bullish, they are cheap, and give me partial protection if the stock turns against me. For example, on qcom, at 116, I have May 100 puts. The delta at that point is -0.25, so if it drops from 116 I get 0.25 protection for every $1 drop in stock price. In other words, instead of losing, say $100, I "only" lose $75. Not great, but better than nothing.
If the stock drops to 100, the delta is now -0.43, so my protection is 43 cents for every dollar loss. This is theoretical based on Black-Scholes, and the actual protection is higher because the volatility premium on the put would go up.
If the bottom were to drop out and the stock go below 100 (which I don't expect), then I have no further losses, and a $1 for $1 protection.
Now, if the stock goes up, then the value of the put decreases, but my loss limit is only what I payed for the put. I still have full appreciation on upside moves. |
