beginners corner

Ask Alan #170 – Are Protective Puts Necessary?

Alan answers a question posed by Jill, who asks:

Alan,
I have read both Encyclopaedias and watched your covered call writing program and have learned so much. However, I am on the fence about wether to buy protective puts for my trades. How do we decide whether buying puts is best for our trades? Thanks a lot Jill

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It’s the 2nd Wednesday of the month. Time for another original episode of Ask Alan. AA#170, “ Are Protective Puts Necessary?”

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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

7 Responses to “Ask Alan #170 – Are Protective Puts Necessary?”

  1. Alan Ellman May 13, 2020 6:08 pm #

    Premium members:

    This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates.

    Also included is the mid-week market tone at the end of the report.

    For your convenience, here is the link to login to the premium site:

    https://www.thebluecollarinvestor.com/member/login.php

    NOT A PREMIUM MEMBER? Check out this link:

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    Alan and the BCI team

  2. Alan Ellman May 14, 2020 10:41 am #

    Premium members:

    The latest Blue Chip Report for the best-performing Dow 30 stocks for the June contracts has been uploaded to our member site. Look in the “resources/downloads” section (right side) to access the new report.

    Alan

  3. Roni May 14, 2020 3:26 pm #

    Alan,

    this is a very clear and important explanation.

    I do believe in insurance, and pay each year for my home, car and other assets I possess.
    But, for the covered calls trading system, I do not buy protective puts.
    Because in my opinion, the BCI methodology is a low risk investment game, already protected by many careful choices, diversification, and excelent exit strategies, and therefore, adding protective puts is an unnecessary and expensive mistake.

    Roni

    • Hoyt T May 14, 2020 6:55 pm #

      Hey Roni,

      Good to hear from you. I hope you and the Missus are holding up well. Marie and I are fortunate that we have children and grandchildren to bring us our groceries. We would order them online but our children and grandchildren want to be helpful and we appreciate that. I haven’t heard recently how the virus id doing in Brasil. My state, Georgia, has partially opened. The verdict is still out on the outcome. Regardless, Marie and I are staying isolated.

      I hope you and your wife stay safe.

      I agree with you about protective puts for all the reasons you listed. Like you I have pretty much withdrawn from the market until the volatility goes way down. All I am doing now is same-day expiration Iron Condors on the SPX. Some days, like Wednesday of this week make that more exhilarating than I like. 🙂

      Take care old friend,

      Hoyt T

      • Roni May 15, 2020 3:12 pm #

        yhank you Hoyt,

        we are fine, and still totally isolated, same as you.

        The governor of the state of Sao Paulo has extended the quarentine for the second time, now until Mai 31.

        The epidemic here in Brzil is still at it’s peak, more then 13,000 deceased, and aprox. 700 in the last 24 hours.
        We are hoping for a relief soon.

        My partner’s father 94, is in the hospital since last Satuarday, and will probably not survive.

        It is horrific – Roni

  4. Andrey May 18, 2020 8:35 am #

    Alan,
    I think,to get a better idea about the absolute power of this collar strategy, it would be even better if you can provide some calculations, for example: If you bought one of the different OTM protective puts (minus 5%,10% of the cost basis of your stock) and if your stock crashes (minus 5% and lower) how much your protection has INCREASED in value in comparison to the cost basis of your long stock which has fallen. This will help us to judge our overall position in this stock. Maybe this protective put will now be so costly that it has “lifted” our overall stock value from negative to positive!!
    For me the dilemma to spend my hard earned money to buy protection is very closely connected with what can I gain at the end of the day or how much my loss can be mitigated by this protection if the market dives.
    Regards

    • Alan Ellman May 19, 2020 2:42 am #

      Andrey,

      Excellent point. Comparing put strikes and the pros and cons of each strike must be assessed before making an investment decision. It is comparable to comparing strikes for covered call writing where we turn to the “Multiple Tab” of the Ellman Calculator.

      For put-selling, we have the Elite Put Calculator which had 5-columns for strike selection for both the long puts and short calls. See the image below.

      CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.

      Alan

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