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Protective
Puts
Function:
Hedging
Outlook:
Neutral/Pessimistic
When
you buy put options you
hedge (reducing
your risk) in that particular stock. Buying puts gives you
the right, but not he obligation, to sell the underlying stock at a
certain price. You are paying a premium for this measure of
security, but you are also limiting your potential downside.
Example:
You own 1,000 shares of Microsoft (MSFT) and you're afraid it may go
down in the next month. The stock trades for $30 and you think
it may go to below $28. You buy put options with a strike
price of $28 for $.50 each, costing you $500.00. If MSFT goes below
$28, you can exercise the put options and sell your MSFT at
$28. If the stock doesn't go below $28, the put options will
expire worthless, and you don't get your $500 back.
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