Why I Don't Like To Buy S&P 500 Puts As 'Insurance' - A Rebuttal

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A long put gives you the right to sell the underlying stock at strike price A. If there were no such thing as puts, the only way to benefit from a downward movement in the market would be to sell stock short. But when you use puts as an alternative to short stock, your risk is limited to the cost of the option contracts. But be careful, especially with short-term out-of-the-money puts.

If you buy too many option contracts, you are actually increasing your risk. Options may expire worthless and you can lose your entire investment. Puts can also be used to help protect the value of stocks you already own. These are called protective puts. A general rule of thumb is this: You can learn more about delta in Meet the Greeks. Try looking for a delta of.

In-the-money options are more expensive because they have intrinsic value, but you get what you pay for. If the stock goes to zero you make the entire strike price minus the cost of the put contract. For this strategy, time decay is the enemy. It will negatively affect the value of the option you bought. After the strategy is established, you want implied volatility to increase.

Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Options investors may lose the entire amount of their investment in a relatively short period of time.

Multiple leg options strategies involve additional risksand may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point.

The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct. Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice.

System response and access times may vary due to market conditions, system performance, and other factors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy.

The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns.

The Options Playbook Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between. The Strategy A long put gives you the right to sell the underlying stock at strike price A. Maximum Potential Loss Risk is limited to the premium paid for the put. Ally Invest Margin Requirement After the trade is paid for, no additional margin is required. As Time Goes By For this strategy, time decay is the enemy.

Implied Volatility After the strategy is established, you want implied volatility to increase. Use the Technical Analysis Tool to look for bearish indicators. Break-even at Expiration Strike A minus the cost of the put.

The Sweet Spot The stock goes right in the tank.

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