Earnings season-How Do I Help Protect My Stock with Options?

Earnings season can be a time when stock prices may see abnormal movements. In the days or weeks leading up to earnings release, implied volatility (IV) may also rise unusually high.

As an investor, it is important to hedge your investment against downside risk during earnings season.

A protective put option is a risk management strategy that involves purchasing a put option for a stock you already own. In this article, we will explain what a protective put option is, how it works, and when it may be appropriate to use this strategy.

A protective put option is a type of options contract that gives the holder the right, but not the obligation, to sell a stock at a specified price, known as the strike price, at any time before the option expires. The holder of a put option generally hopes to profit from a decline in the stock's price below the strike price. They may also have an optimistic outlook for the long term but are concerned with the short-term drop in the stock's value.A protective put option is different from a naked put option, where the holder does not own the underlying stock. With a protective put option, the holder already owns the stock and is using the option as some protection against potential losses.

Let's say you own 100 shares of a fictional company's stock at a $166 per share cost basis. You are concerned that the stock may decline in value after it releases earnings, so you purchase a put option with a strike price of $165 for a premium of $3.2 per share, with an expiration date of 05/05/23.If the stock price does decline to $150, you have the right to sell your shares at the higher strike price of $165, limiting your losses to $4.2 per share ($165 - $166 - $3.2). If the stock price stays above $165, you can let the option expire and continue to hold your shares. Another possible route to take if the stock price seems to be moving favorably could be to try and sell-to-close the put before expiration in an effort to recoup some of its initial cost from opening the position. In this way, a protective put option acts like insurance, protecting the holder against downside risk below the strike price in case the stock falls by expiration, while still allowing them to participate in any potential upside gains.

A protective put option can be useful in a variety of situations. For example, if you are holding a stock that has had a strong run-up in price and you are concerned about a potential market downturn, you can use a protective put option to help limit your losses or protect unrealized gains while still holding onto the stock. Similarly, if you are holding a stock that has a high degree of volatility, a protective put option can help protect against sudden price movements. It is important to note, however, that purchasing a protective put option does come at a cost. The premium paid for the option will reduce your overall net return on the investment, so it is important to weigh the potential benefits against the cost of the option.In conclusion, a protective put option may be a useful risk management strategy for stockholders who are looking to help protect their investments against downside risk below the strike price and during the life of the put option. By purchasing a put option for a stock that you already own, you can limit your losses while still participating in potential upside gains. It is important to carefully consider the costs and benefits of this strategy before implementing it.

1. Already holds shares of specific stock

2. Specific stock detailed quotes

3. Transform tap [Quotes] to [Options]

4. Select [Put]

5. Choose your expiration date and strike price

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