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Investing with options - Securing your tech stock gains with simple hedging strategies 2/2
Koen Hoorelbeke
Options Strategist
Summary: In part two of our guide, we expand on how to use put options as a "profit-insurance" for each of the Magnificent 7. Tailoring strategies for each stock, we help you secure your portfolio against volatility, ensuring your tech investments remain robust through market ups and downs.
Investing with options: Expanding your investment shield with put options across the Magnificent 7
Introduction
Welcome back to the second installment of our series on safeguarding your investments in the tech sector's elite—the Magnificent 7. In our previous article, we laid the groundwork by using Microsoft as a blueprint to understand how put options function as protective insurance for your stock gains. Now, we're ready to broaden our horizon, applying the insights gained to the entire lineup of these tech giants.
From Apple to Tesla, we'll navigate the options landscape for each of these market leaders, providing you with a toolkit of strategies to maintain the robust health of your portfolio, regardless of market tremors. We'll explore varied expiry dates and strike prices, tailoring the hedge to fit the unique position of each stock in your collection.
Prepare to fortify your investment knowledge further, as we delve into the practical steps and considerations for selecting put options that align with your investment goals and risk appetite. Let's continue our journey towards confident, informed investing in an unpredictable market.
You can find part 1 of this serie here: Investing with options - Securing your tech stock gains with simple hedging strategies - 1of2
Important disclaimer: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.
You can jump directly to one of the Magnificent 7, by clicking on one of the links below:
Underlying Stock:
- Ticker: MSFT (Microsoft Corporation)
- Last Traded Price: $404.23
Option Trade Details:
- Type: Put (Long Position)
- Strike Price: $415
- Expiration Date: 17-May-2024
- Premium (Price to Pay): $21.50 per share
- Quantity: 1 contract (100 shares equivalent)
- Total Premium Paid: $2,150.00 USD
Maximum Risk:
- The maximum risk is limited to the premium paid for the put option, which is $2,150.00.
Maximum Potential Profit:
- The profit potential is substantial if MSFT declines significantly, capped only by the company's stock price potentially going to zero, leading to a theoretical maximum profit of $39,350.00 (excluding the cost of the premium).
Profit If Stock Price Drops by 5%, 10%, and 15% from the Last Traded Price:
5% Drop: New stock price = $404.23 * 0.95 = $383.82
- Profit = [(Strike Price - New Stock Price) * Quantity] - Premium Paid
- Profit = [($415 - $383.82) * 100] - $2,150.00
- Profit = $3,118.00 - $2,150.00 = $968.00
10% Drop: New stock price = $404.23 * 0.90 = $363.81
- Profit = [(Strike Price - New Stock Price) * Quantity] - Premium Paid
- Profit = [($415 - $363.81) * 100] - $2,150.00
- Profit = $5,119.00 - $2,150.00 = $2,969.00
15% Drop: New stock price = $404.23 * 0.85 = $343.80
- Profit = [(Strike Price - New Stock Price) * Quantity] - Premium Paid
- Profit = [($415 - $343.80) * 100] - $2,150.00
- Profit = $7,120.00 - $2,150.00 = $4,970.00
Strategy Summary:
- This long put option can be used to hedge against a potential decline in MSFT's stock price. If MSFT's stock price drops by 5%, 10%, or 15%, the put option will yield profits of $968.00, $2,969.00, and $4,970.00, respectively, after considering the cost of the option. This strategy provides a risk management tool for investors who want to protect against downside risk while maintaining a known and limited potential loss.
Underlying Stock:
- Ticker: AAPL (Apple Inc.)
- Last Traded Price: $182.33
Option Trade Details:
- Type: Put (Long Position)
- Strike Price: $195
- Expiration Date: 17-May-2024
- Premium (Price to Pay): $14.00 per share
- Quantity: 1 contract (100 shares equivalent)
- Total Premium Paid: $1,400.00 USD
Maximum Risk:
- The maximum risk is limited to the premium paid for the put option, which is $1,400.00.
Maximum Potential Profit:
- The profit potential is substantial if AAPL declines significantly, capped only by the company's stock price potentially going to zero, leading to a theoretical maximum profit of $18,100.00 (excluding the cost of the premium).
Profit If Stock Price Drops by 5%, 10%, and 15% from the Last Traded Price:
5% Drop: New stock price = $182.33 * 0.95 = $173.21
- Profit = [(Strike Price - New Stock Price) * Quantity] - Premium Paid
- Profit = [($195 - $173.21) * 100] - $1,400.00
- Profit = $2,179.00 - $1,400.00 = $779.00
10% Drop: New stock price = $182.33 * 0.90 = $164.10
- Profit = [(Strike Price - New Stock Price) * Quantity] - Premium Paid
- Profit = [($195 - $164.10) * 100] - $1,400.00
- Profit = $3,090.00 - $1,400.00 = $1,690.00
15% Drop: New stock price = $182.33 * 0.85 = $154.98
- Profit = [(Strike Price - New Stock Price) * Quantity] - Premium Paid
- Profit = [($195 - $154.98) * 100] - $1,400.00
- Profit = $4,002.00 - $1,400.00 = $2,602.00
Strategy Summary:
- This long put option acts as a hedge against a potential decline in AAPL's stock price. If AAPL's stock price drops by 5%, 10%, or 15%, the put option will yield profits of $779.00, $1,690.00, and $2,602.00, respectively, after considering the cost of the option. This strategy can be employed by investors who are looking to protect their position against downside risk with a defined maximum loss.
Underlying Stock:
- Ticker: NVDA (Nvidia Corporation)
- Last Traded Price: $731.73
Option Trade Details:
- Type: Put (Long Position)
- Strike Price: $755
- Expiration Date: 17-May-2024
- Premium (Price to Pay): $80.00 per share
- Quantity: 1 contract (100 shares equivalent)
- Total Premium Paid: $8,000.00 USD
Maximum Risk:
- The maximum risk is limited to the premium paid for the put option, which is $8,000.00.
Maximum Potential Profit:
- The profit potential is significant if NVDA declines substantially, capped only by the company's stock price potentially going to zero, leading to a theoretical maximum profit of $67,500.00 (excluding the cost of the premium).
Profit If Stock Price Drops by 5%, 10%, and 15% from the Last Traded Price:
5% Drop: New stock price = $731.73 * 0.95 = $695.14
- Profit = [(Strike Price - New Stock Price) * Quantity] - Premium Paid
- Profit = [($755 - $695.14) * 100] - $8,000.00
- Profit = $5,986.00 - $8,000.00 = -$2,014.00 (a loss since the stock drop does not cover the premium paid)
10% Drop: New stock price = $731.73 * 0.90 = $658.56
- Profit = [(Strike Price - New Stock Price) * Quantity] - Premium Paid
- Profit = [($755 - $658.56) * 100] - $8,000.00
- Profit = $9,644.00 - $8,000.00 = $1,644.00
15% Drop: New stock price = $731.73 * 0.85 = $622.47
- Profit = [(Strike Price - New Stock Price) * Quantity] - Premium Paid
- Profit = [($755 - $622.47) * 100] - $8,000.00
- Profit = $13,253.00 - $8,000.00 = $5,253.00
Strategy Summary:
- This long put option acts as a hedge against a potential decline in NVDA's stock price. If NVDA's stock price drops by 5%, 10%, or 15%, the put option would result in a loss of $2,014.00, a profit of $1,644.00, and a profit of $5,253.00, respectively, after considering the cost of the option. This strategy is for investors who anticipate a downturn in NVDA's market value and wish to hedge against this risk with a known maximum potential loss.
Underlying Stock:
- Ticker: GOOGL (Alphabet Inc. - A Shares)
- Last Traded Price: $141.04
Option Trade Details:
- Type: Put (Long Position)
- Strike Price: $160
- Expiration Date: 17-May-2024
- Premium (Price to Pay): $19.50 per share
- Quantity: 1 contract (100 shares equivalent)
- Total Premium Paid: $1,950.00 USD
Maximum Risk:
- The maximum risk is limited to the premium paid for the put option, which is $1,950.00.
Maximum Potential Profit:
- The profit potential is significant if GOOGL declines substantially, capped only by the company's stock price potentially going to zero, leading to a theoretical maximum profit of $14,050.00 (excluding the cost of the premium).
Profit If Stock Price Drops by 5%, 10%, and 15% from the Last Traded Price:
5% Drop: New stock price = $141.04 * 0.95 = $133.99
- Profit = [(Strike Price - New Stock Price) * Quantity] - Premium Paid
- Profit = [($160 - $133.99) * 100] - $1,950.00
- Profit = $2,601.00 - $1,950.00 = $651.00
10% Drop: New stock price = $141.04 * 0.90 = $126.94
- Profit = [(Strike Price - New Stock Price) * Quantity] - Premium Paid
- Profit = [($160 - $126.94) * 100] - $1,950.00
- Profit = $3,306.00 - $1,950.00 = $1,356.00
15% Drop: New stock price = $141.04 * 0.85 = $119.88
- Profit = [(Strike Price - New Stock Price) * Quantity] - Premium Paid
- Profit = [($160 - $119.88) * 100] - $1,950.00
- Profit = $4,012.00 - $1,950.00 = $2,062.00
Strategy Summary:
- This long put option acts as a hedge against a potential decline in GOOGL's stock price. If GOOGL's stock price drops by 5%, 10%, or 15%, the put option will yield profits of $651.00, $1,356.00, and $2,062.00, respectively, after considering the cost of the option. This strategy is for investors who are concerned about downside risk in GOOGL's market value and want a risk management tool with a known maximum potential loss.
Underlying Stock:
- Ticker: AMZN
- Last Traded Price: $168.05
Option Trade Details:
- Type: Put (Long Position)
- Strike Price: $185
- Expiration Date: 17-May-2024
- Premium (Price to Pay): $19.70 per share
- Quantity: 1 contract (100 shares equivalent)
- Total Premium Paid: $1,970.00 USD
Maximum Risk:
- The maximum risk is limited to the premium paid for the put option, which is $1,970.00.
Maximum Potential Profit:
- The profit potential is significant if AMZN declines substantially, capped only by the company's stock price potentially going to zero, leading to a theoretical maximum profit of $16,530.00 (excluding the cost of the premium).
Profit If Stock Price Drops by 5%, 10%, and 15% from the Last Traded Price:
5% Drop: New stock price = $168.05 * 0.95 = $159.65
- Profit = [(Strike Price - New Stock Price) * Quantity] - Premium Paid
- Profit = [($185 - $159.65) * 100] - $1,970.00
- Profit = $2,535.00 - $1,970.00 = $565.00
10% Drop: New stock price = $168.05 * 0.90 = $151.25
- Profit = [(Strike Price - New Stock Price) * Quantity] - Premium Paid
- Profit = [($185 - $151.25) * 100] - $1,970.00
- Profit = $3,375.00 - $1,970.00 = $1,405.00
15% Drop: New stock price = $168.05 * 0.85 = $142.84
- Profit = [(Strike Price - New Stock Price) * Quantity] - Premium Paid
- Profit = [($185 - $142.84) * 100] - $1,970.00
- Profit = $4,216.00 - $1,970.00 = $2,246.00
Strategy Summary:
- The long put option on AMZN is a defensive play to guard against a potential drop in the stock price. Should the stock price fall by 5%, 10%, or 15%, the put option would result in profits of $565.00, $1,405.00, and $2,246.00, respectively, factoring in the cost of the option.
Underlying Stock:
- Ticker: META
- Last Traded Price: $471.20
Option Trade Details:
- Type: Put (Long Position)
- Strike Price: $510
- Expiration Date: 17-May-2024
- Premium (Price to Pay): $54.00 per share
- Quantity: 1 contract (100 shares equivalent)
- Total Premium Paid: $5,400.00 USD
Maximum Risk:
- The maximum risk is limited to the premium paid for the put option, which is $5,400.00.
Maximum Potential Profit:
- The profit potential is significant if META declines substantially, capped only by the company's stock price potentially going to zero, leading to a theoretical maximum profit of $45,600.00 (excluding the cost of the premium).
Profit If Stock Price Drops by 5%, 10%, and 15% from the Last Traded Price:
5% Drop: New stock price = $471.20 * 0.95 = $447.64
- Profit = [(Strike Price - New Stock Price) * Quantity] - Premium Paid
- Profit = [($510 - $447.64) * 100] - $5,400.00
- Profit = $6,236.00 - $5,400.00 = $836.00
10% Drop: New stock price = $471.20 * 0.90 = $424.08
- Profit = [(Strike Price - New Stock Price) * Quantity] - Premium Paid
- Profit = [($510 - $424.08) * 100] - $5,400.00
- Profit = $8,592.00 - $5,400.00 = $3,192.00
15% Drop: New stock price = $471.20 * 0.85 = $400.52
- Profit = [(Strike Price - New Stock Price) * Quantity] - Premium Paid
- Profit = [($510 - $400.52) * 100] - $5,400.00
- Profit = $10,948.00 - $5,400.00 = $5,548.00
Strategy Summary:
- The long put option on META provides a hedge against a decline in stock price. If the stock price decreases by 5%, 10%, or 15%, the put option yields profits of $836.00, $3,192.00, and $5,548.00, respectively, after the cost of the option is considered. This strategy could be useful for investors who are bearish on META and wish to capitalize on potential downward movements in its stock price while having a fixed and limited downside risk.
tsla
Tesla, Inc. (TSLA)
Underlying Stock:
- Ticker: TSLA
- Last Traded Price: $199.68
Option Trade Details:
- Type: Put (Long Position)
- Strike Price: $215
- Expiration Date: 17-May-2024
- Premium (Price to Pay): $26.50 per share
- Quantity: 1 contract (100 shares equivalent)
- Total Premium Paid: $2,650.00 USD
Maximum Risk:
- The maximum risk is limited to the premium paid for the put option, which is $2,650.00.
Maximum Potential Profit:
- The profit potential is significant if TSLA declines substantially, capped only by the company's stock price potentially going to zero, leading to a theoretical maximum profit of $18,850.00 (excluding the cost of the premium).
Profit If Stock Price Drops by 5%, 10%, and 15% from the Last Traded Price:
5% Drop: New stock price = $199.68 * 0.95 = $189.70
- Profit = [(Strike Price - New Stock Price) * Quantity] - Premium Paid
- Profit = [($215 - $189.70) * 100] - $2,650.00
- Profit = $2,530.00 - $2,650.00 = -$120.00 (a loss since the stock drop does not cover the premium paid)
10% Drop: New stock price = $199.68 * 0.90 = $179.71
- Profit = [(Strike Price - New Stock Price) * Quantity] - Premium Paid
- Profit = [($215 - $179.71) * 100] - $2,650.00
- Profit = $3,529.00 - $2,650.00 = $879.00
15% Drop: New stock price = $199.68 * 0.85 = $169.73
- Profit = [(Strike Price - New Stock Price) * Quantity] - Premium Paid
- Profit = [($215 - $169.73) * 100] - $2,650.00
- Profit = $4,527.00 - $2,650.00 = $1,877.00
Strategy Summary:
- The long put option on TSLA serves as a hedge against a price decline. If TSLA's stock price decreases by 5%, 10%, or 15%, the put option results in a loss of $120.00, a profit of $879.00, and a profit of $1,877.00, respectively, after accounting for the premium paid. This strategic position could be beneficial for investors looking to protect against or profit from a downturn in TSLA's stock price, with a clear maximum risk at the cost of the option premium.
Conclusion: Embracing Flexibility in Your Hedging Strategy
As we wrap up our exploration of using put options to protect investments in the Magnificent 7, it's crucial to remember that the strategies and examples provided throughout this series are intended to serve as inspiration and a starting point for your own investment journey. The financial markets are in constant flux, and it's very likely that by the time you're reading this article, the prices of the stocks we've discussed—and consequently, the cost of associated options—will have changed.
This reality doesn't diminish the value of the insights shared but rather underscores the importance of understanding the underlying thought process. Adaptability and informed decision-making are key. You may find that different strike prices or even different expiry dates better suit your needs as market conditions evolve. The goal of this series has been to equip you with the knowledge to navigate these decisions confidently, tailoring your approach to option trading to fit your unique investment profile and objectives.
Remember, the journey to becoming a savvy investor is continuous. As you gain experience and insight, your strategies will naturally adapt to reflect your growing expertise and the ever-changing market landscape. We encourage you to use what you've learned as a foundation, building upon it with further research as needed. Your investment path is uniquely yours—make informed choices, stay flexible, and keep your goals in sight.
For continuous insights and updates on market/options strategies, interact with me/follow my social media account on Threads.
Previous "Investing with options" articles:
- 19 Feb 2024: Investing with options - Securing your tech stock gains with simple hedging strategies - 2of2
- 19 Feb 2024: Investing with options - Securing your tech stock gains with simple hedging strategies - 1of2
- 2 Feb 2024: Investing with options - Microsoft - buying stock or options - a comparison
- 25 Jan 2024: Investing with FX options - Hedging USDJPY currency risk
- 8 Jan 2024: Investing with FX options - Hedging currency risk
- 30 Nov 2023: Investing with options - striking gold (GLD)
- 23 Nov 2023: Investing with options - hedging the Nasdaq 100
- 17 Nov 2023: Investing with options - Nvidia - pre-earnings
- 10 Nov 2023: Investing with options - AdYen - post investor day
- 31 Oct 2023: Investing with options - Novo Nordisk earnings
- 31 Oct 2023: Investing with options - Apple earnings
- 24 Oct 2023: Investing with options - Amazon earnings
- 24 Oct 2023: Investing with options - Meta Platforms earnings
- 23 Oct 2023: Investing with options - Alphabet earnings
- 20 Oct 2023: Investing with options - Microsoft earnings
- 18 Oct 2023: Investing with options - Tesla earnings
- 17 Oct 2023: Investing with options - long bonds - TLT
Listen to our brand new podcast: "Saxo Options Talk"
- 14 Feb 2024: Options Talk - Episode 07 - Put Spreads
- 7 Feb 2024: Options Talk - Episode 06 - Delta
- 31 Jan 2024: Options Talk - Episode 05 - Short Call Spreads
- 24 Jan 2024: Options Talk - Episode 04 - Long Call Spreads
- 17 Jan 2024: Options Talk - Episode 03 - Long Calls
- 10 Jan 2024: Options Talk - Introducing -Options Talk by Koen and Peter- -Your Weekly Podcast on Options Trading
Related articles:
- From zero to hero - buying options
- From zero to hero - selling options
- From zero to hero - option strategies
- From zero to hero - options lexicon
- Why options strategies belong in every traders toolbox
- Understanding and calculating the expected move of a stock etf index
- Understanding Delta - a key guide for Investors and Traders - part 1
- Understanding Delta - a key guide for Investors and Traders - part 2
- Trading 0DTEs - get your feet wet - without drowning - part 1
- Trading 0DTEs - get your feet wet - without drowning - part 2
Previous "Volatility reports":
- Volatility report - week 7 - 12 feb 24 -- 16 feb 24
- Volatility report - week 6 - 5 feb 24 -- 9 feb 24
- Volatility report - week 5 - 29 jan 24 -- 2 feb 24
- Volatility report - week 4 - 22 jan 24 -- 26 jan 24
- Volatility report - week 3 - 15 jan 24 -- 19 jan 24
Previous "What are your options" articles:
- 12 Feb 2024: What are your FX options - USDJPY - after 148 breakout
- 24 Jan 2024: What are your options - Tesla Q4 Earnings
- 18 Jan 2024: What are your FX options - EURUSD elevated volatility
- 12 Jan 2024: What are your options - Coinbase after BTC ETF approval
- 21 Nov 2023: What are your options - Nvidia earnings
- 08 Nov 2023: What are your options - Disney earnings
- 26 Oct 2023: What are your options - Nasdaq Selling Premium
- 29 Aug 2023: What are your options - Salesforce earnings
- 25 Aug 2023: What are your options - the Qs - Nasdaq etf
- 23 Aug 2023: What are your options - Nvidia - earnings - market reactions
- 21 Aug 2023: What are your options - swing trading semi-conductors - stocks vs options
- 18 Aug 2023: What are your options - using TLT as an inverse proxy for the 10 year yield
Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.
This article may or may not have been enriched with the support of advanced AI technology, including OpenAI's ChatGPT and/or other similar platforms. The initial setup, research and final proofing are done by the author.