know your options: IBM rolling over
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know your options: IBM rolling over Hi Mark I bought a few thousand shares of IBM at 117. It is now trading at 115. Do I use puts or calls to protect my positions? Thanks, Rose Hi Rose, The answer is 'either.' I prefer using calls, but take look at your alternatives: If you want a lot of protection - if you want to be certain you don't get clobbered if the stock takes a big tumble, then you should buy puts. But this is very expensive proposition. You consider the expense as the cost of buying (expensive) insurance. For example, you can pay approximately $340 (for each put - and that means 10 such puts per 1,000 shares) for the Oct 115 put. If you buy these puts, for the next 5 weeks you have the right to sell your IBM shares at 115, no matter how low the price goes. If you make this choice, then this is your bottom line:
If you are willing to settle for less protection, if you want a better chance to earn a profit, and if you are willing accept only partial protection (and that means getting clobbered if the stock declines by a large amount), then selling calls is the right approach. For example, you can sell the Oct 115 calls and collect about $390 for each.
-- Mark D. Wolfinger Create Your Own Hedge Fund: Increase Profits and Reduce Risk with ETFs & Options |
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