Insuring Your Stock Positions Against Disaster

Good morning, Power Profit Traders!

Goodbye, Staples Center. Hello, Arena.

That was the headline of a Los Angeles Times story yesterday, regarding buying the naming rights to the famed Staples Center.

Now, if that doesn’t hint at the 3G Crypto Revolution we’re about to witness, I don’t know what will.

But hey, I’m not here to talk crypto today.

In fact, if Wall Street were an amusement park, cryptocurrency would be the extreme roller coaster you wait hours in line to ride

The topic I want to discuss now would be the ride ticket line: boring… but absolutely necessary if you want to play.

Specifically, today I want to discuss insurance — and how you can use put options to insure your stock positions.

Plus, we’ll get into the FAANG stock that could be making shareholders nervous.

Are AAPL Bulls Nervous?

There’s all types of insurance out there: life, auto, home, rental, boat…

People insure things they want to protect in the event of a disaster — and that can include stocks.

When one owns at least 100 shares of stock, they can buy to open one put option on that stock to act as an insurance policy, so to speak, in the event of a nosedive on the charts.

Buying a put gives the trader the right to “put” the stock to the markets at a specific price (the strike price), should the underlying stock move below that level before the options expire.

For instance, if I bought 100 shares of Stock XYZ for $120 a few months ago, and the stock rallied to $150, I might want to lock in some of those gains — or at least protect against a steep pullback.

I could buy to open a $140-strike put option with two months to expiration, thereby “marrying” the put to my stock position.

That would ensure that if XYZ fell BELOW $140 in that time frame, I could exercise my put option and unload my shares for $140, protecting my position from further downside.

However, just like you don’t buy homeowners insurance HOPING for a hurricane, you don’t buy options insurance hoping for one on the charts.

A “married put” buyer is still bullish overall — they want their stock to keep churning higher. In this case, the put expires worthless and the gains made via the long stock position offset the premium paid for the put, which represents the maximum risk on the option.

As such, traders typically buy married puts at deep out-of-the-money strikes — or at least at a level they’d be comfortable unloading their shares — and often with some shelf life via LEAPS, or Long-term Equity AnticiPation Securities.

In fact, it looks like some shareholders may be nervous about an Apple (AAPL) pullback, per today’s Unusually High Put Option Volume list.

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With so many folks bullish on AAPL by virtue of shorter-term call options, it caught my attention that AAPL’s $125-strike put expiring April 14 was popular on Wednesday.

Apple stock closed yesterday above $153, so these puts are, in fact, deep OTM with quite a bit of shelf life, underscoring our “married puts” theory.

That’s all for now – talk again soon!

Tom Gentile
America’s #1 Pattern Trader

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