Question

Assume you just purchased 100 shares of Apple stocks at $300. You are worrying that the competition from other tablet PC and smart phone producers will have a negative impact on Apple stock prices in 1 month. Generally speaking, you are still quite bullish on Apple stock. In order to hedge against this downside risk, you establish a protective put position by buying a put option contract with around 1-month maturity on Apple stock. However, the premium of the put option with strike price at $300 is $12, which is quite expensive. If you feel purchasing the put option with strike price at $300 and $12 premium is too expensive, what else can we do to reduce the cost of protective put position

Answer 1

If you believe that the premium is too expensive, then you should try to purchase another put option with a lower strike price. This will probably reduce your potential profits, but it will also decrease the amount of money that you will pay for the put options. For example, a put option with a strike price of $290 might be worth $5.