Gunnsmoke
Howdy all....A couple of thoughts about staying in the game, but protecting yourself in the process. This is for swing trades, not day trades where you are done by the end of the day.
As we witnessed on Wed, the market can take a wicked turn south. That was nothing compared to what could happen to say the least. So what to do?
Married Put Time! (This is only for those who have fire insurance on their house, others may stop here) Maybe you like a stock like AUPH. You're willing to risk 1k on the play. Support is around 6.50 right now, about .69 from where it is now. Your 1k risk divided by .69 makes for around 1,450 shares. But you are aware that some bad news in combination with an accident in the market and you could wake up to it being $2.50 down, or 3.6x your risk. Ouch.
But with a married put, you can cap your risk and sleep tight. Under no circumstance could you lose more than your 1k. Right now, you could buy the 7.5 puts for 64 days out for about 1.30, maybe a little less. That gives you a guaranteed sale price of 7.50 for your shares, minus the 1.30 you paid for the privilege. That's 6.20, or $1 away from its current price. That means you can buy 1k shares and be at risk for only that $1 per share.
How might that play out? The 7.5's have a delta of .47, so that means if the stock goes up by $1, then the puts will lose .47 per share. That's the price for being protected, like your house's fire insurance. As it goes up more and more, this delta will get less and less, so the puts become less of an anchor around your neck.
Now here's a perfectly plausible scenario: AUPH get amazing news and spikes to $10.50. You love the profit and decide to close it out for 3.35 per share. Your puts will not be worthless, but perhaps they are only worth .10, so you decide to hold those in case something strange happens. You have locked in 2.05 profit no matter what on your $1 risk, so it's already a home run. But perhaps it slashes back and forth and pulls back to 7.5 a week later. You can buy stock against those puts or cash them out for perhaps another .50, making the total profit on the play of 2.55.
Let's look at the opposite: Catastrophic news spikes it down to $3 per share, where it seems to find support. No more sellers there. Your shares are down $4.15 per share, but your puts are up $3.20 (7.5 minus the 1.30 for the puts ). You still like the play. You cash in on the puts and you can either buy more puts, or wing it from there. A $1 retracement up and you're back to scratch.
I hope that makes sense! It's good planning in today's precarious market.
