One of the main principles of any successful options trading system is to hold onto your gains and cut your losses. Some traders even consider this to be the most important principle of trading. Unfortunately, the heavy losses suffered by options traders year in and year out indicate that many people are not adhering to this principle.
Fortunately, there is an options trading system you can use to cut your losses and walk away a winner—even if things aren’t going according to plan. In fact, this particular trading strategy is designed to protect your core investments against adverse market movements.
Known as protective equity puts, this options trading system works with your existing stock portfolio. It functions as a way to arrest a downward slide in share price—at least for your personal portfolio. It is an effective strategy to use if you are worried about market uncertainty or future falls and would like to get a bit of insurance to protect yourself against a heavy financial loss.
To use this options trading system, you need to identify the stocks in your portfolio that you are bullish about in general, but worried about overall. Although protective equity puts have traditionally been used only on individual stocks, they can also be used for ETFs and some index funds. In this way, you can get insurance on most of your existing portfolio.
Once you have your list together, you will want to determine what percentage of each position you would like to protect with puts. Most traders opt to insure the entire position, although depending on your reasoning and motivation for being in the stock in the first place you may opt for a partial put option. Either way, remember that protective equity puts are sold in units of 100 shares, so you will want to even out your investments accordingly.
The next stage is to bookmark your current share prices. This will serve as a reference point on your protective equity puts. You will want to buy your protective equity puts for a share price that is just below the current share price of the stock. These puts give you the right to sell your holdings at the price you’ve lock in at a future date.
Depending on your confidence in the market, the size of the investment, and the market trends you are working with, you may choose short term or long-term contracts for the puts. If you want to lock in profits as you go, you can choose shorter dates for the puts and renew them at slightly higher share prices as the underlying stock rises.
If the stock goes down, with the protective equity puts in place you will be able to close out the position with a relative small loss. If you determine that even at the lower price you’d like to keep your holding, you are under no obligation to sell it and can simply let the protective equity puts expire. Its an options trading system that many stockholders over look, but it can protect you against financial ruin.
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