Put options grant the holder or buyer of the put stock options the right to sell the underlying security at the strike price until the expiry date. In turn, the seller or writer of the put has the obligation to buy or take delivery of the underlying security until expiration.
Suppose you hold a high-quality stock in your portfolio that you believe will rise in price over the long term. But you’re concerned about a possible downturn in the market in the short term. You can buy a put option for the stock. This will give you the right to sell your stock at a set price (the strike price) within a certain time frame (before the expiry date).
If the stock price stays above the strike price, you would let the option expire unexercised—you only lose the cost of the put. But if the market declined drastically, you could exercise your option and sell your shares to the writer of the put at the strike price. You could then, if you wanted to, buy the shares back again at the lower market price.
Note, though, that buying put options for insurance is like betting against yourself. You’re better off just selling the stock if you think it’s going to drop in price. Furthermore, you may be right about a market decline, but you have to hope it happens before your put expires. If the decline takes a while to occur, you could continue to buy puts for a considerable period of time. That would eat steadily into your eventual profits.
At TSI Network, we recommend using our three-part Successful Investor philosophy:
Invest mainly in well-established companies;
Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
Downplay or avoid stocks in the broker/media limelight.
Understanding stock options will lead you to see them as highly speculative investments—and more like a gamble than a sure thing
While it’s possible to make money in stock options, it’s important to realize that there’s a large element of risk in these speculative investments—and you… Read More
BMO U.S. PUT WRITE ETF $14.36 (Toronto symbol ZPW) sells put options on a range of U.S. large-cap stocks to generate income for the ETF. These options give the put buyers the right to sell specific stocks to the ETF at a pre-determined price. Buyers profit when… Read More
This month we look at two new ETFs launched by U.S. providers. The first promises to provide some protection when markets decline, and the second invests in companies that will benefit from the work-from-home trend.
NATIONWIDE RISK-MANAGED INCOME EQUITY ETF $27.45 (New York symbol NUSI) seeks to provide regular… Read More
Early in my investment career, before I had much money of my own to invest, I took a strong interest in market indicators (also known as investor rules of thumb, investor guidelines, market lore and so on). Who could resist? Market indicators seemed to provide… Read More
BMO US PUT WRITE ETF $16.99 (Toronto symbol ZPW) sells put options on a range of U.S. large-cap stocks to generate income for the ETF. These options give the put buyers the right to sell specific stocks to the ETF at a pre-determined price. Buyers profit when a stock’s… Read More
If you’re going to engage in stock market speculation, you should stay out of stock options and warrants. Here’s why:
Stock market speculation and why doing it through stock options will most likely lead to losses
An option is a contract between a buyer and a seller,… Read More
Here we take a closer look at two relatively new North American ETFs. This month’s selections include a quantitative, low-volatility Canadian equity ETF and a global pet-products ETF.
FRANKLIN LIBERTY RISK MANAGED CANADIAN EQUITY ETF $21.04 (Toronto symbol FLRM; Market cap: $12.7 million) aims to invest in Canadian equities… Read More
If you want to get better value investing returns, it’s important to focus on stocks that are cheap in relation to earnings, and consider a variety of other investment qualities like years of profit, years of paying dividends, and manageable debt
If you invest in good… Read More
Many aggressive investors find the lure of stock options hard to resist. However, despite that appeal, the vast majority of investors lose money with options.
Call options give the holder, or buyer, the right to purchase the underlying security at a specified “strike” price up until… Read More
Here’s the text of the most-recent letter I sent to our Portfolio Management clients in late January:
“Many investors now feel stock prices are too high, and offer little potential for capital gain, based on various market indicators. However, negative views like this have been common… Read More
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Changes to this Policy
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Legal Notices and Disclaimers
The contents of this web site and our publications are based upon sources of information believed to be reliable, but no warranty or representation, expressed or implied, is given as to their accuracy or completeness. Any opinion reflects the Successful Investor’s judgment at the date of publication and neither the Successful Investor, nor any of its affiliated companies, nor any of their officers, directors or employees, accepts any responsibility in respect of the information or recommendations contained in the publications or on this web site. Moreover, the information or recommendations are subject to change without notice.
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