| Did you know there was a way to buy insurance for | | | | will expire worthless. You may choose to buy |
| your stocks? It allows you to keep some of the | | | | another put again if you believe the markets are still |
| money you have invested if your stock crashes, | | | | uncertain or if you would like to insure some of the |
| which could be very powerful when times are | | | | profits you have already made. |
| uncertain. | | | | 2. The stock goes down a little or stays Flat |
| It works by utilizing something called a put option. | | | | If the stock stays flat the option will eventually |
| When you buy a put option on a stock you are | | | | expire and you can decide what to do next. You will |
| buying the right to sell your stock at a certain level | | | | not have to exercise your put, and can decide to |
| on or before a given date. | | | | buy back the option to reclaim some of your |
| So, say for example you buy a stock trading at $46 | | | | premium. |
| and decide that you want some protection to the | | | | 3. The stock Crashes |
| downside. You can buy the $40 put option 6 months | | | | If the worst case scenario happens, the stock gets |
| out for $5. Now if the stock crashes you will be able | | | | cut in half and is now trading at $23. If we had just |
| to buy the stock at, at least $40 within the next 6 | | | | bought and held the stock we would have lost $23, |
| months. | | | | however because we bought the $40 out we can |
| So, let's go through every scenario. | | | | exercise our right to sell the stock at $40. |
| 1. The stock Goes up | | | | This strategy is called a protective put and can save |
| If the stock goes up to say $70 within that 6 month | | | | us from the majority of a loss if things turn against |
| period you will have profited and the put you bought | | | | us. |