A Hedging Strategy for Nervous Investors: The Power of Protective Puts and Collars

As the stock market continues to experience volatility, nervous investors may be looking for ways to protect their portfolios from significant losses. Two popular hedging strategies that investors can employ are protective puts and collars. These strategies can help limit potential losses while still allowing for upside gains.



Protective Puts

A protective put is a hedging strategy that involves purchasing a put option on a stock that the investor already owns. The put option acts as insurance, allowing the investor to sell the stock at a predetermined price (the strike price) if the stock's price falls below that level. This helps to limit the investor's potential losses.

For example, an investor who owns 100 shares of a stock at $100 per share might purchase a put option with a strike price of $90. If the stock's price falls to $80, the investor can exercise the put option and sell the stock for $90, limiting their loss to $10 per share.