The best put protection strategy is anytime. In a bear market? Buy index puts. In a bull market? Keep them in your portfolio, states Bob Lang of ExplosiveOptions.net.
Veteran traders and investors may scoff at the idea of insuring their portfolio with a put protection strategy. Even a new trader might say, “Markets always rise in the long run. Why do I need to worry about a drop here and there?”
Well, aside from losing money, negative psychological effects (like doubt) and undue stress take over when markets keep going down. Panic sets in and we begin to ask, “How far will stocks go down? Will it ever end? I have lost so much money, will I ever get it back?” Once you’re in panic mode, it’s really hard to turn around your mindset.
And by the way, this can easily happen during a bull market—or when a bear market is experiencing a short-term bullish trend. When stocks are making new highs on strong volume trends and sentiment and technical indicators are very bullish, the case to get on board and hold on is solid.
Yet, you must remember that stocks don’t go straight up forever. There are frequent pauses in a bullish trend or bull market. If markets stop going up and reverse without notice, you may find yourself giving back hard-fought gains and then some. It’s maddening. Why do traders expose ourselves to this form of punishment?
You don’t have to! That’s where a put protection strategy comes in.
No matter what kind of market you are trading in, you cannot predict the future. You have no idea when the market will change direction, which leads to a lot of worry. Buy index put options and use them to protect your portfolio at all times. These instruments are rarely used in the way they were intended, but for a small cost you can save yourself from a lot of stress.
Put options will not prevent you from losing money—but they will prevent you from losing a lot of it. I have found it much easier to trade, even in uncertain and volatile markets, if I have some put protection on. Try it out. I bet you’ll sleep better at night knowing you are protected to the downside.
Learn more about Bob Lang at ExplosiveOptions.net.