By Don Fanstone, Member of the Kitchener/Waterloo User Group
March 1, 2015
Think of Buying Put Options as a means to realize capital gain when Optionable stocks are falling in price and you expect them to continue to fall.
For example, you might consider buying a put long:
- To use as an alternative to selling short.
- To gain leverage.
- To reduce risk.
- To hedge long positions you don’t want to sell.
- To hedge your entire portfolio or profit from a downturn by playing Index options such as the S&P 500 (SPY).
Buying Put Options with a delta of .80 will realize a gain of approximately $.80 for each $1.00 the stock falls in price.
With a stock selling at $50.00 buying a “Put” Deep in the Money” means buying a “Put” with a Strike Price that is higher in value than the Actual Price of the stock.
A $55.00 Put on a $50.00 stock is “Deep in the Money” (DITM).
A $50.00 Put on a $50.00 stock is “At the Money” (ATM).
A $45.00 Put on a $50.00 stock is “Out of the Money” (OTM)
Your entry for a Long Put will typically be ITM or ATM.
- Risk is limited to the cost of the premium.
- Reward is unlimited until the stock price hits zero.
- Break-even: strike price minus the cost of the put premium.
CONSIDERATIONS: A few things to look for when considering Buying Puts:
- MTI is falling after a sustained uptrend
- DEW down or Confirmed Down Market Timing Signal
- A stock with a high P/E ratio. (30 or greater)
- A stock with an RSI > 90.
- A stock that is far above its 50-Day Moving Average (DMA). (30% or more)
- A stock “Turning Over”. A new high followed by one or more Red Candles.
- A falling RT with a value of less than 1.0.
- A falling DPO with a value of less than 1.0
- A stock below its 30-DMA and trending down.
- Negative Stochastics and Advance/Decline values.
There is an inclination on the part of most investors to BUY stocks with the intention of realizing a gain as the stock appreciates in value. Coming to grips with profiting as the stock falls in price is not normal for most investors. However, stocks tend to fall much faster than they go up. Take profits quickly, you’ll sleep much better!
I encourage all to read Lee Lowell’s book “Get Rich With Options”; go to VV University and watch the Video on Options; read Dr. DiLiddo’s article in the Views Manager under Special Reports; and attend the VV Options Course.
Understand Options Before you begin to trade. There is much to learn.
Trades since Monday Feb. 23:
Feb. 23 Sold 10 IPL July 27’s @ $6.65. Bought Dec. 22/14 @ $5.00 Profit $1,650
Feb 23 Sold 5 ENB July 52’s @ $9.70. Bought Feb. 4 @ $11.95 Loss $1,125.
Feb 24. Sold 4 CNR June 70’s @ $16.70, Bought Jan. 20 @ $12.65 Profit $1,640.
Feb 24 Sold 10 CNR June 72’s @ $15.00, Buy Nov. 26 @ $13.00. Profit $2,000.
Feb. 24 Buy 7 CTC.A Aug. 110’s @ $15.55 Sold Feb 26 @ $22.70 Profit $5,005.
Feb. 26. Buy 5 SWKS Aug. 75’s @$17.07 US. (Open Contract)
Feb. 26 Buy 10 AVO July 21’s @ $5.00 (Open Contract)
Feb. 27 Buy 10 MIC July 28’s @ $4.70 (Open Contract)
The MTI is nearing a top in the USA and in Canada, see the one year MTI graph.
Read Dr. DiLiddo’s Feb. 20 and Feb. 28 comments on the US market.
This is not an ideal time to be adding Call Options or Buying Stock Long with the expectation that the markets are going to move up strongly.
Follow Dr. DiLiddo’s advice, don’t sell everything, be aware and be cautious.
DISCLAIMER: Options trading involves risk and is not suitable for everyone. The information contained in this Blog is for education and information purposes only. Example trades should not be considered as recommendations. Options training is strongly recommended before placing any trades. VectorVest offers a basic options course online and occasional intermediate options workshops in Canada each year.
Thanks Don for that list of “considerations”. I’ve ordered the book you mentioned, and I’m expecting it in a couple days so really looking forward to reading. On the weekend I went through years worth of STOW videos at VV university that talked about options within the VV program. It would be really nice if they had the videos indexed, nevertheless I learned a lot.
A good start. To trade options, you will need to set up a margin account with your broker. There is no charge to do this, but a formality that needs to be accomplished before you can buy or sell options. A margin account does not mean that you must trade on margin. Best you learn what your broker has in it’s procedure.
Learning about any subject is a life long learning process, the more you know, the better prepared you are.
Never stop learning.