Jump to navigation

Free Newsletter Modern Trader Follow

Main menu

  • Futures
    • Modern Trader Magazine
    • Commodities
    • Futures Mag Archives
    • ETFs
    • Financials
    • Forex
    • Managed Funds
    • Market Analysis
    • News
    • Options
    • Regulation
    • Technology
    • Trading Strategies
    • Education
    • Futures Op-Ed
  • Favorites
    • Alpha Pages Most Popular
    • Futures Magazine
    • Modern Trader Magazine
    • Most Popular
    • Slideshows & Lists
    • Special Topics
      • Alpha Hunters
      • Bad Boys
      • FINtech
      • High-Frequency Trading
      • Trader's Life
      • Trading Strategies
      • FUTURES MAG's 500th ISSUE
      • We asked traders
  • Traders
    • Market Data
    • Hot Charts
    • Interactive Charts
    • Trading Calendar
  • FINalternatives
  • Hard Assets
    • Home
    • Base Metals
    • Precious Metals
    • Rare Earth Metals
    • Commodities
    • Mining Investments
    • Slideshows
  • Modern Trader
    • Subscribe
    • Past Issues
  • All +
    • Follow Us +
      • FuturesMag
      • Newsletters
      • Facebook
      • Google+
      • Linkedin
      • Twitter
      • RSS Feeds
    • About Us +
      • About
      • Advertise
      • Contact
      • Contribute
      • Privacy Policy
  • !
Follow Futures          
       
more >>

We Asked Traders

We asked traders for their opinion on the launch of bitcoin futures

Sponsored Content

Trading

Equities.com launches unlimited trading via Tradier Brokerage, Transforming into a news & fintech portal

Featured Topics

more Commodities>>

Commodities

Energy demand steps back in play
Advertisement
more Volatility>>

Volatility

Volatility & opportunity in the energy sector
more Financials>>

Financials

Daily Price Action: E-mini S&P 500
more Options>>

Options

Trading Vertical Option Spreads

Advertisement

Using the “platinum hedge” to stretch out profits

By J.L. Lord

April 24, 2013 • Reprints

For the majority of market participants, the recent new highs are as much a time for concern as they are for celebration. Two emotions exist: Fear and greed. Do I stay long shares of stock and make more money (greed), but risk giving back a major portion of the profits should I participate in a long overdue correction (fear)?

For newer option traders you have a few tricks up your sleeve that stock traders don’t. Married puts and collars do a decent job of providing protection, but at a huge cost (in risk, capital and/or profit potential).

An example of a married at-the-money put is: Take a stock such as Apple Computers, Inc. (AAPL), which closed on April 3, 2013, at $431.99. The ATM 430 strike put will cost you $21.35, or $2,135 per put contract. This equates to 4.9% of the share price. Similarly, the married out-of-the-money put, called a “disaster put,” can be used to hedge a position. For example, suppose to avoid the high cost of ATM insurance, a trader opts to buy a 400 strike put that closed at $9.20. It does cut the price of the insurance down by more than half, but now the put does not kick in to protect the position (on expiration) until the stock falls below $400. With this position the stock can drop down to a $390.08 break-even price (400 strike – $9.20 put cost) before the put does any favors. This, too, is unacceptable by most traders’ standards.

A better solution is the “platinum hedge,” which is a strategically created put butterfly position that is used to hedge a long stock (or index, commodity, etc.) position. It is constructed in a way that takes the underlying’s probable range into consideration, yet offers close to the same protection (if done correctly) as a married put at a fraction of the cost. An example:

1) Long 100 shares of AAPL at $431.99

2) Long 1 contract 430 – 375 – 320 put butterfly ($21.35, $4.10, $0.52)

Because we are buying an ATM 430 strike put when purchasing the butterfly hedge, any drop in the price of the underlying below $430 causes the butterfly to pick up intrinsic value immediately. This will offset the loss on the declining share value. Had we simply bought the 430 put naked as a hedge, it would have been a $21.35 investment, but the butterfly costs just a tad over half of that when trading for $13.67 (see “Long stock & long butterfly”).

Page 1 of 2
>>next >

About the Author

Related Articles
Trading Vertical Option Spreads
Options Strategies for trading soybeans, record yield or not
Trump bump or dump?
Election play in gold options
S&P 500: futures vs. options
Previous
New approach in analyzing forex markets
Next
Gold bugs scatter
Related Terms
options 445Apple 327Aapl 74Options strategy 16Butterfly 5platinum hedge 1Apple Computers Inc. 1

Free Newsletter Modern Trader Follow

Main menu

  • Futures
    • Modern Trader Magazine
    • Commodities
    • Futures Mag Archives
    • ETFs
    • Financials
    • Forex
    • Managed Funds
    • Market Analysis
    • News
    • Options
    • Regulation
    • Technology
    • Trading Strategies
    • Education
    • Futures Op-Ed
  • Favorites
    • Alpha Pages Most Popular
    • Futures Magazine
    • Modern Trader Magazine
    • Most Popular
    • Slideshows & Lists
    • Special Topics
      • Alpha Hunters
      • Bad Boys
      • FINtech
      • High-Frequency Trading
      • Trader's Life
      • Trading Strategies
      • FUTURES MAG's 500th ISSUE
      • We asked traders
  • Traders
    • Market Data
    • Hot Charts
    • Interactive Charts
    • Trading Calendar
  • FINalternatives
  • Hard Assets
    • Home
    • Base Metals
    • Precious Metals
    • Rare Earth Metals
    • Commodities
    • Mining Investments
    • Slideshows
  • Modern Trader
    • Subscribe
    • Past Issues
  • All +
    • Follow Us +
      • FuturesMag
      • Newsletters
      • Facebook
      • Google+
      • Linkedin
      • Twitter
      • RSS Feeds
    • About Us +
      • About
      • Advertise
      • Contact
      • Contribute
      • Privacy Policy
  • !
images