Option Trading Benefit #2 – Protecting Your Investment

Benefit #2 – Hedging

In the 1st EXCLUSIVE GUIDEBOOK,  available when you signup, I analyzed an investment of 500 GE shares made on 02 Jan 08 without the protection offered by options and the results were abysmal.  As of 31 Aug 09, the 500 shares of GE stock had lost approximately 62% of their value.  Thats right, 62%!!  However, the same portfolio re-analyzed with the protection or “hedge” offered by put options resulted in a loss of only 35%.  How is this possible??  Well, put options make this possible.

A put option gives the buyer a right to sell 100 shares of stock (or ETF, etc) at a predetermined price on or before expiration.  Additional details about put options are covered under Option Basics.  For example, let’s say you own 100 shares of GE and you buy a 30 put to “hedge” or protect your shares.  Now, GE stocks unexpectedly drops from $35 to $25, which results in a of $1000 on 100 shares of GE.  However, the put option gives you the right to sell your stock at $30/share.  That would save you $500, cutting your losses in half!!  You could even hedge with a 35 put, but the premium for the put option would be equally higher.

By “hedging” your portfolio with options, you can prevent significant losses in your investment portfolio and even turn a profit during market downturns.  For further details, please signup on the main page  www.optionosity.com to receive the guidebook.

Continue reading about the additional benefits of option trading!!  Or go back and review the 1st benefit of options trading – minimum capital.