Protective Puts vs. The Stop Loss

E

ess1096

Thought I'd start a weekend chat on the subject.

I prefer the Protective Puts to manage risk when I swing trade a large position. When I began trading I would swing stock positions unprotected (gambled). Then I started using Stop Loss orders under support but got shaken out of too many otherwise great trades. So I started swinging Long Call positions for a while to limit the downside risk and eliminate the shakeout factor, but my drawdown from expired contracts was unacceptable.

I have found that I feel very comfortable swinging a large stock position (1 or 2 weeks) while holding the front month puts as a hedge. So far it's been my best strategy. And this way, my position doesn't expire on expiration day, just my insurance policy does.

Example: I went long a modest stock position in GROW in the middle of the week and added a large Call position (Jun $22.50's @ .90) as it broke out on Friday. If GROW gaps up on Monday as I think it will I'll put in a bid for Jun $25 puts to lock in profits while letting the position work. I might even sell the stock position to pay for the puts with the profit, a free insurance policy. :D My only regret.....I didn't pick up some puts at the close in case of a Monday morning gap DOWN.

Anyone else prefer the Protective Puts over the Stop Loss? Any opinions against it?
 
Quote from Prevail:

have you looked at longer term puts for lower theta or put backspreads?
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Not really, I don't get too sophisticated with option strategies. Pretty much just long calls, long puts and the occasional straddle. Not to mention that I use Scottrade and they don't let any naked sales.
 
Quote from ess1096:

Thought I'd start a weekend chat on the subject.

I prefer the Protective Puts to manage risk when I swing trade a large position. When I began trading I would swing stock positions unprotected (gambled). Then I started using Stop Loss orders under support but got shaken out of too many otherwise great trades. So I started swinging Long Call positions for a while to limit the downside risk and eliminate the shakeout factor, but my drawdown from expired contracts was unacceptable.

I have found that I feel very comfortable swinging a large stock position (1 or 2 weeks) while holding the front month puts as a hedge. So far it's been my best strategy. And this way, my position doesn't expire on expiration day, just my insurance policy does.

Example: I went long a modest stock position in GROW in the middle of the week and added a large Call position (Jun $22.50's @ .90) as it broke out on Friday. If GROW gaps up on Monday as I think it will I'll put in a bid for Jun $25 puts to lock in profits while letting the position work. I might even sell the stock position to pay for the puts with the profit, a free insurance policy. :D My only regret.....I didn't pick up some puts at the close in case of a Monday morning gap DOWN.

Anyone else prefer the Protective Puts over the Stop Loss? Any opinions against it?
More...

Hang in there but watch out for the big spreads on protective puts that may not work in your favor. I would stick to a stop personally and not put options.
 
Quote from ess1096:

Thought I'd start a weekend chat on the subject.

I prefer the Protective Puts to manage risk when I swing trade a large position. When I began trading I would swing stock positions unprotected (gambled). Then I started using Stop Loss orders under support but got shaken out of too many otherwise great trades. So I started swinging Long Call positions for a while to limit the downside risk and eliminate the shakeout factor, but my drawdown from expired contracts was unacceptable.

I have found that I feel very comfortable swinging a large stock position (1 or 2 weeks) while holding the front month puts as a hedge. So far it's been my best strategy. And this way, my position doesn't expire on expiration day, just my insurance policy does.

Example: I went long a modest stock position in GROW in the middle of the week and added a large Call position (Jun $22.50's @ .90) as it broke out on Friday. If GROW gaps up on Monday as I think it will I'll put in a bid for Jun $25 puts to lock in profits while letting the position work. I might even sell the stock position to pay for the puts with the profit, a free insurance policy. :D My only regret.....I didn't pick up some puts at the close in case of a Monday morning gap DOWN.

Anyone else prefer the Protective Puts over the Stop Loss? Any opinions against it?
More...


protective puts + long stock = synthetic call

outright call = synethetic call.

protective puts + long stock equal to delta on puts = synthetic straddle.

So its all the same.

Here's another idea for you... You can get delta neutral if you are unsure of the very short term gap moves. Lets simplify.

You own 1000 shares of a stock but are nervous about holding for the weekend. At the money puts have an example delta of -45. So 10 puts = -450 shares. At the end of the trading day, just buy the 10 puts and sell 550 shares so you have 450 long and -450 via puts. If you get a big gap move either way, you make out on the gamma (also called gamma scalping). If the stock doesn't move, you sell the puts in the morning and buy back the stock. You've entirely eliminated adverse gap risk, and basically turned your outright long into a synthetic straddle.

off the head example:

(i'm synthetic straddling onxx right now):

buy 10 puts onxx at 1.70
bought 400 shares onxx at 31.00.

if onxx gaps to 20, my puts are worth 10.50 or so. gain of $8800. The stock loses $4400. Net gain on downward gap of $10 is $4400.

if onxx gaps up to 40, my puts are worth $0 ($1700 loss) and my stock gains $3600. $1900 gain.


Drop in IV and decay of the puts gets you here, so it pays to go out a little further in the calendar. Of course, gamma is higher in the front months usually, so you'll make out much bigger if you do get gap moves. If you get an IV rampup, though, you can make $$ without the underlying stock even moving. This strategy really turns your directional play into a volatility play temporarily.

Also -- this is very cheap to do if you have portfolio margin on the account, since your entire risk is the cost of the long options.
 
Quote from scriabinop23:

protective puts + long stock = synthetic call
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Exactly, I am aware that it is a synthetic call. But the reason I like my strategy better than just swinging the calls outright for swing trades of a few days to a couple of weeks is the fact that the position does not expire on expiration day. So If I was a little early with the position I can still hold it and I'd only have to renew my puts.

For example, I had a position in MW May 45 calls. I was early and the $45s went slightly ITM on expiration day. They are near $53 now!! If I was swinging the stock protected by Puts I'd be looking good now and would consider the price of the Puts as my insurance deductable.

It's not my intention when I put on a trade to try to make money on the puts, they are merely there for risk management since my bias is bullish when I put the position on. And unlike with a stop loss order, I don't get shaken out.

When you buy a nice new car you only think about how nice it looks and the compliments you'll get on it. You don't buy it because you want to crash it or get it stolen but still you buy insurance. No different here.

My above GROW example is really not a good one because it's actually using Puts to protect profit on a call position. Still a good move but my OP is actually about swinging Long Stock/Long Puts.
 
Quote from scriabinop23:

(i'm synthetic straddling onxx right now):

buy 10 puts onxx at 1.70
bought 400 shares onxx at 31.00.

if onxx gaps to 20, my puts are worth 10.50 or so. gain of $8800. The stock loses $4400. Net gain on downward gap of $10 is $4400.

if onxx gaps up to 40, my puts are worth $0 ($1700 loss) and my stock gains $3600. $1900 gain.
More...

How did you decide on 10 puts to 400 shares ratio? Looks like a good trade.
 
Quote from ess1096:

How did you decide on 10 puts to 400 shares ratio? Looks like a good trade.
More...
Using delta to get neutral and thus ends up with the synthetic straddle.
10 long puts have delta (in this example) of minus 450 whereas the 1000 long stock has a delta of 1000. The combined delta is thus 1000 minus 450=550. So there's an excess of long 550 delta. To neutralise these (get delta neutral) he needs to short 550 deltas. This he does by selling 550 stocks. Therefore ending up with the final position of long 450 shares and long 10 puts, i.e. delta is zero/neutral. The risk graph is that of a long straddle (5 long puts plus 500 (approx.) shares = synthetic long call AND the other 5 long puts thus make up the synthetic straddle).
db
 
Hi ,

Well, to begin with I trade with a stop, but if my trade gets into money I wouldn't mind using a protective put to protect my profits, and that too if I am still expecting some more juice from the trade.
 
Quote from ess1096:

Example: I went long a modest stock position in GROW in the middle of the week and added a large Call position (Jun $22.50's @ .90) as it broke out on Friday. If GROW gaps up on Monday as I think it will I'll put in a bid for Jun $25 puts to lock in profits while letting the position work. I might even sell the stock position to pay for the puts with the profit, a free insurance policy. :D My only regret.....I didn't pick up some puts at the close in case of a Monday morning gap DOWN.
More...
Timing is everything :)
 
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