I've been reading about using protective puts as a way to "hedge" (or limit) your losses on already profitable positions. But no matter how I slice or dice numbers, it doesn't make sense. Here's a concrete example: I bought some RGR for $51.48 earlier this year. No that it is $63.62 (+23%) I was wondering if I can buy a protective put to strengthen this position. There are lots of metrics for choosing the put, but the one that does make sense for me is annualized break even price. The best put within 10% protection is Jan 15 60.5 P, which has ~12.3% of annualized break even yield ($1035 net cost vs $1214 total gain). Only if I am allowed to drop protection down to 13.55% the annualized break even yield gets to 4.4% (Oct 55). As I suspected, it that good protection is too expensive. I'm not sure I want $55 strike (too low), but everything closer to money hurts a lot. What do you think? Is there a real viability of protective puts? Every position I investigate seems to be too pricey.
Protection via puts can be expensive. You might consider selling an OTM call option to finance the purchase of the put, ie. A collar. I'll do this sometimes with a position that has a solid unrealized gain that i want to protect but also want to avoid selling the stock and realizing the capital gain for tax purposes. You can continue to roll the collar up as it expires. Its a pretty conservstive strategy and can have a place in a long term portfolio with companies that pay nice dividends.
you're not thinking correctly. why would you protect the downside when you can sell now and take the full profit? are you hoping that it's going higher? or are you scared that its going lower? if you think its going higher why buy a put? waste of money. if you think its going lower sell now? you in essence protected all your profit.
Depending on your outlook you could collar it as well. Sell calls to fund the put purchase. It sounds like you're well up the wall of worry, though. Maybe it's just time to sell.
I don't agree when you say he is not thinking correctly? He wishes to create a limited risk position which is a perfectly acceptable way of managing risk. Some choose to use stop losses - to each their own. Not everyone wants to micromanage every swing in a stock.
If taxation isn't an issue or you aren't sure how long you want to hold the stock, why not sell out the stock and buy a call? Synthetically equal to long stock plus a put and there are a lot of different ways to structure it based on your outlook (otm, itm, front month, back month, debit spread,etc.)
A call is NOT equal to owning the stock. It must be paid for and then it expires and must be bought again... and it does not pay dividends. It would seem that if you want to keep upside opportunities open and prevent downside losses a simple STOP LOSS order will serve the purpose, and is free. This will protect you except for the overnight or over-weekend disaster. A 'collar for zero' will protect you for free but only after the stock drops to the strike of the long put. http://www.theoptionsguide.com/costless-collar.aspx Otherwise you have to pay for downside protection. The short call in the collar will prevent you from benefiting from further upside in stock price but will allow you to continue collecting dividends. There is no free lunch.