Position Protection – buying a Put

One of the common steps I take in protecting a long position is to initiate an Option Collar. However, there are times where I don’t want to cap things on the long side — so what is the right approach?

One path to take is to buy a Put, pay the premium to protect the long position. Why would you want to do this? Let’s use my current Fab 5 position in $ORLY as an example. Here are a few scenarios to consider:

  1. The stock pops after the anticipated event (in the case of my $ORLY trade, the $AZO earnings are coming up so a sympathy move is quite possible). If the stock does pop, you then sell the upside Call to cover the cost of the outlay for the Put (once you are comfortable that price has stalled, consolidation occurs, pick a strike above).
  2. The stock tanks. Oh no! This is when you will be quite glad that you own that Put.
  3. Stock price goes sideways. Do nothing until price moves up or down in a meaningful way (#1 or #2 become relevant).

 

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