Buy insurance for your stock

Do you know of a way to buy insurance for your stocks? It allows you to keep some money you invest, and if your stock crashes, it can be very powerful when it is uncertain.

It works by using a put option called. When you buy a put on a stock, you are buying rights to sell the stock at a certain level on or before the specified date.

So, for example you buy a stock trading at 46 dollars and decide you want some protection down. You can buy a $ 40 put option for 6 months out of $ 5. Now if the stock collapses, you will be able to buy stocks for at least $ 40 over the next 6 months.

So let's go through each scene.

1. Stock Up

If a stock rises to $ 70 in six months, you will profit and the stock you buy will lose value. If you think the market is still uncertain, or you want to make sure you have earned some of the profits, you can choose to buy another one again.

2. Stocks fall a little or remain flat

If the stock remains open, options will eventually expire and you can decide what to do next. You do not have to exercise your points and can decide on a repurchase option to reclaim some of your premium.

3. Stock Crash

If the worst case happens, stock halves now if we just bought and Holding the stock, we will lose $ 23, however, since we bought $ 40, we can exercise our right to sell the stock for $ 40.

This tactic is called a protective input and can save us from most of the losses if things are against us.