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Ken Trester, Managing Editor

Jeff Carter, Senior Editor

The Put Option Advantage
by Ken Trester

When you buy options, you should always buy both puts and calls. However, based on our research and track record over seventeen years—even though we recommended the same number of puts and calls for stocks — the put investments by far provided the best return with the most home runs.

Therefore, I would bias my options portfolio with more puts than calls.

Puts provide more home runs for stocks, not only due to surprise volatility, but also to the fact that when stocks fall, panic can set in and enhance the decline. And, of course, there is the institutional influence.

Many years ago Joe Granville and I were discussing our love for put options, and he made a good analogy. When stocks rise in price, it is like climbing the steps of the Empire State Building, but when they fall, it is like jumping off the Empire State Building.

Stock prices fall much more sharply than they rise, and that is what you are betting on—violent price action. Consequently, puts give you more bang for your buck.

There is also another advantage; puts are usually cheaper than calls. This is due to the fact that puts and calls are priced based on the cost of holding the underlying position and a call is a surrogate for the stock.

Owning a stock is more expensive than shorting a stock, the same purpose of a put.

Part Two: Buy Put Options for Low-Risk Portfolio Insurance
by Jeff Carter, Senior Editor

Most investors are familiar with call options, primarily because they are the easiest to understand. A call is simply a substitute for buying a stock. If the stock price rises, chances are the price of the call option will also rise.

However, most investors are not as familiar with the call option’s opposite, a put option. And for this reason, they hesitate to use puts to their full advantage.

All You Need to Know (Profit Both Ways)

But here is all you need to know -- a put option profits when a stock price falls.

In fact, it is the existence of put options that makes options an “all seasons investment.” Because regardless of whether the market is rising or falling, you can use options to profit from a move in either direction.

Even more so than a call option, buying a put option is a “defensive” strategy.

Here’s why:

No matter what current market conditions are, it is always a good idea to be ready for a sudden pullback. In today’s market that is more important than ever. Computer-driven trading and push-button money transfers can cause sudden market falls almost overnight. And even if the market itself doesn’t collapse, individual stocks do almost every day.

While a call option provides for less of a cash loss in such instances, put options actually profit from them. That is why professionals often hedge their stock portfolios by buying put options.

The best strategy for buying portfolio insurance is to buy underpriced put options on stocks that fall further than the market during a decline.

The best place to find these options is in our Power Options listings available every week to subscribers of our Complete Option Report newsletter.

A Basic Strategy

When you buy puts, be sure to "time-diversify" by always owning puts that expire in every month of the year. These puts may pay off even if the market or your stocks don’t fall.  So not only will you be buying portfolio insurance but you may also develop an entire new profit center.

Buying a put option is as easy as buying a call option. And your risk is the same -- you can only lose what you pay for the option, nothing more.
The drawback to buying a put option is the same as with buying a call option -- it has a limited life, and it might expire before the stock makes the move you are anticipating.

You never know when the market might suddenly catch a bad case of the chills. And you certainly want to be in the game and ready to profit if it does. Buying put options is the least risky way to do that.

Legal, Publishing and Trading Information:  The Complete Option Report is published by Ultimate Option Strategies Company; 1494 Union Street San Diego, California. Managing Editor: Ken Trester. Senior Editor: Jeff Carter Publisher: Ron Jackson. It is a violation of United States laws to duplicate or reprint this publication for redistribution in any quantity without permission. Copyright ©2009-2010. All rights reserved. We advise all readers that there can be high risk in options trading. You can lose your entire investment. Individual results may vary from those achieved by the newsletter, and no actual investment positions are taken by the newsletter. It cannot be assumed that present or future recommendations will be profitable or equal past performance. The information contained herein has been obtained from sources believed to be reliable but there is no guarantee it is accurate or complete and it should not be relied upon. This publication should only be used by sophisticated investors who are fully aware of the risks in options trading. Additional Legal Notices and Terms of Purchase.