Friday, October 20th, 2017

Stock option strategies – hedging?

Hi, I am new to trading stock options. my question is when ppl say you can buy a stock coverage and buy a put option (so if the stock price down so you can recover the loss from the price increase in put option) or vice versa. . but the stock price and option premium to not move $ $. . Say, for example, If I buy Microsoft @ $ 20, and purchase of $ 20 – $ 25 put option. . if stock prices fell to $ 18, since option usually earn $ 2. . then how do you protect yourself? Is there any relationship, for each 100 shares, buy 2 contracts (200 shares) the put option or anything like that. . plz let me know

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3 Responses to “Stock option strategies – hedging?”
  1. TheCommonYak says:

    Hedging by purchasing a protective put is simple; it’s a little like buying insurance. The put contract limits how far the value of that position can fall. If the stock price falls below the strike price of the put, the value of the put increases to make up for it. So the value of your overall investment cannot fall below the strike price minus whatever option premium you paid.

    Remember that the option premium has two parts: the intrinsic value, and the time value. When the put is in the money, the intrinsic value is the difference between the strike price and the price of the underlying stock; under these circumstances, the intrinsic value does in fact move $1 for every dollar that the stock price moves. The time value of an option depends on the volatility of the stock and how long you have until expiration.

    In my opinion, protective puts should be used sparingly. They really won’t help you make money, but will help limit losses for the duration of the contract.

  2. real estate says:

    yes, it won’t hedge completly, because we must pay the premium.

  3. Max M says:

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    Good luck.

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