Spread Trading: An Introduction to Trading Options in Nine Simple Steps

CHAPTER 32

Insuring Your Investment

The group gathered again in Lon’s study for their third and final night together.

 

Aaron began. “Remember that what we’re doing here is laying a foundation. It’s taken us years to learn all we know and we can’t share it all in just three evenings. That would be impossible. But still this is a great foundation for you.”

“In fact,” added Nate, “before we’re finished tonight, you’ll know the structure for the two most basic trades in options, as well as five spread trades ... and that’s a lot more than most investors know. So you’ve really come a long way.”

 

 

 

The first trade we’ll talk about is the protective put.

 

 

“It sure feels that way,” said Shorty, “but I’m anxious to learn more.”

“So let’s get started,” replied Nate. “To begin with, I want to emphasize that in all option trades we’re trying to find the best combination for (1) making money, and (2) reducing risk. Trying to make money without reducing risk is just gambling, and there’s no reason to do that. It’s always possible to significantly reduce risk, so it’s just irresponsible not to do it. In fact, we can lower the risk so much that we can literally trade without fear.”

“At the same time,” added Aaron, “there’s no sense in trading if we’re not going to make money: we want to rely on ourselves for our financial security; we don’t want to rely on others. That’s why we’re trading. So all we want to do, in any given circumstance, is find the best combination for both reducing risk