The Secret Advantages of Trading Options

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Trading Puts

The insurance policy protects you against the loss of your vehicle, and the inputs that go into pricing the put are virtually the same as those that go into pricing your car insurance. Let's take a look and do a quick comparison:

1. The car is like the stock. You've got a lot of cabbage invested in both and you'd like to protect it should either get into an accident!

2. How long you elect to protect the asset is the term, or in options parlance it's known as the expiration.

3. The deductible describes how much loss you are willing to take before the insurance kicks in. If you want zero-deductible insurance, you will pay more than if you want $500- or $1,000-deductible insurance. The same is true for puts, as the at-the-money put is a zero deductible and a $5 out-the-money put kicks in after your stock has fallen by $5.

4. The premium is how much you are paying for the protection!

Next: Buying Calls