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
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
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 is more expensive than shorting a stock, the same purpose of a
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
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
Even more so than a call option, buying a put option is a “defensive”
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
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
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
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.