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.