Portfolio Armor For Individual Investors
More about put options
Put options (often simply called "puts") give an investor the right, but not the obligation, to sell a particular security at a specified price (the strike price of the option), on or before a certain date (the expiration date of the option).
How put options can be used to hedge your risk
Let's say you own a stock that is currently trading at $30 per share. The most you are willing to see this stock drop is 20%, which would be down to a price of $24 per share. If you own a put option on that stock with a strike price of $24, you would have locked in the right to sell that stock for $24 – even if the price of the stock drops below $24. Note that you would not want to exercise the put option when the stock price is above $24; this is why owning a put option represents the right to sell the stock rather than an obligation.
Not every stock or ETF has put options traded on it, and for those that don't, you might consider using a limit sell order. But limit sell orders may not protect you if your stock or ETF exhibits a downward jump in price. For example, consider the previous case, where you own a stock that is currently trading at $30 per share, and you don’t want to see it go below $24. This time, instead of buying a put option with a strike price of $24, you just place a limit order to sell your shares if they drop to $24. The risk you face in this case is that, in the event of significantly bad news, your stock could drop from $30 to $20, $15, or lower without trading at $24 on the way down.
In the event the stock price jumps downward like that, your limit order would not have let you sell at $24; on the other hand, had you owned puts on this stock with a strike price of $24, you would have been able to sell the stock at $24 even with a downward jump to a new market price much lower than $24.
How Collars Can Reduce Your Cost of Hedging
A collar is a strategy that pairs buying a protective put option on a stock or ETF with selling a call option on the same security. A call option is the opposite of a put option: it gives an investor the right, but not the obligation, to buy a particular security at a specified price (the strike price of the option), on or before a certain date (the expiration date of the option). By selling a call option, you are giving an investor the right to buy your stock or ETF if it appreciates beyond a certain level, and obligating yourself to deliver the stock or ETF if the option is exercised; in this way you are "capping" your potential upside. In return, you are being paid by the buyer of the call option. The income you receive from selling the call option offsets some of the cost of buying the protective put option, so your net cost in opening a collar can be lower than the cost of just buying a protective put.
Why use Portfolio Armor?
To find the optimal puts and optimal collars to give you the level of protection you want at the lowest possible cost. Portfolio Armor uses its proprietary algorithm to instantly sort through and analyze all of the available option contracts for your stock or ETF, taking into account multiple factors including premiums, strike prices, time to maturity, and the number of shares you hold in the security, and presents you with the optimal solution: the protective put options or collars that will give you the level of insurance you seek at the lowest net cost.
How much protection should I have?
In some cases, the cost of protection may be higher than the loss you are looking to prevent. In that case, Portfolio Armor will inform you that no optimal options exist. But aside from that, Portfolio Armor:
- Will tell you the optimal put options to buy based on the level of protection you specify
- Won’t tell you how much protection you should have
- Lets you search for financial professionals who are also members of the site
Each investor is unique and one investor's risk tolerance may differ from another's. If you aren't sure about what your own risk tolerance is, or about how much protection you should have, you may want to consult with a licensed or registered financial professional to discuss this. Please note that Portfolio Armor will not share any of your information with any financial professionals. Portfolio Armor gives individual investors the ability to search for and contact financial professionals who are members of the site; it does not give financial professionals the ability to search for individual investors.Join Now
Portfolio Armor is a tool. While it is a very sophisticated tool capable of providing useful calculations it is not designed to replace the advice of a professional investment counselor or your own independent investment research and independent calculations. To rely solely upon the Portfolio Armor tool for investment decisions would be extremely unwise.