It appears to me that protective puts are mentioned when you “HAVE” an unrealized gain. If you just bought a stock, is it best to buy a put or place a stop loss? If you buy a protective put after you purchase the stock, there’s no way to break-even. However, if you buy a protective put during volatile times, you might be able to keep your stock instead of a stop loss being triggered. I just want some opinions on a protective put/stop loss shortly after purchasing a security…
With a put, you pay for the flexibility of exercising the option. With a stop order, it doesn’t cost you anything to enter the order, however, you can’t control when the stock gets sold. Which is more important to you? $ or Control?
I think they are both a little weird unless it’s a synthetic call. A stop loss gives away options. Buying a put is a bearish move while buying the stock is a bullish one. What’s your opinion anyway? Synthetic calls are good though…
I think the original poster is asking which will be a better “insurance” when purchasing a underlying stock. I agree what buying a put is a berish move, however, it does provide the insurance on the downside. Normally, I go with a put, howeve, given current market condition, I will enter a stop/loss/lock-in-profit order.
No real rule here, but some things to consider: With a stop, the market can gap through your stop and you sell at a price considerably different from your stop, but the put will still be exercisable at the strike price. In jumpy markets like these, that is a consideration. If the put is long-dated, and the market rises significantly, you can still sell the put and recover some remaining time value, although the change in money-ness will reduce the value of the premium recovered. The put is probably better for low-turnover portfolios, since you can create a floor on the price without having to sell the stock. That’s a consideration if you have a portfolio methodology that requires full investment and rebalancing once you exit a position. The effect of whip-sawing, where your stop is triggered and then the stock bounces higher, making you wish you hadn’t sold, is reduced. The stop is often better for a high-turnover or trading strategy, where you are expecting to have cash and dry powder to manage.