Equity options have evolved to complement equity positions. Used in combination with a stock position, options can be used to decrease or increase risk, or to change the risk profile of a position. Two popular option strategies are the protective put and the covered call.
The U.S. exchange-traded equity options market dates back to 1973 and traded over five billion option contracts in 2018. It offers investors options on stock, indexes and ETFs.
To learn more about what an option is and how it works, click here. Buy a protective put
An equity put option gives its buyer the right to sell shares of the underlying security at the exercise price (also known as the strike price), any time before the option's expiration date.
Protective put options can help protect against a declining market. If you think your investments could be impacted by a market downturn and would prefer to maintain your equity investments, you could consider purchasing protective put.
The investor could purchase an at-the-money put, i.e. with an exercise price at or near the current market price of the underlying stock. If the price of the underlying stock declines below the exercise price, the profit on the purchased put option will offset some or all of the losses on the underlying stock held.
Click here for more details.
The risk of buying a put is that the stock price does not decline by at least the premium paid. If the stock price remains at the same level as when the put option was bought, then the premium paid (plus fees) will represent a loss.
The choice of strike price determines where the downside protection 'kicks in’. Buying an out-of-the-money put (i.e. with a strike price below the current market price) will be cheaper but will also offer less protection.
