Put Hedge         

If you are holding a diversified portfolio and you feel it is vulnerable to a market decline, you could buy index puts to protect the whole portfolio. Select an index that best represents your portfolio. If you are holding a particular asset that you feel is vulnerable, you might buy puts on that asset.

If you are correct about the market decline, the losses you incur from the decline in your assets will be offset by the gains made by the increase in value of the puts. When you establish your position, you can make the appropriate calculations to determine the number of puts to purchase to approximately offset your portfolio.

With this strategy, your profits are unlimited (but decreased by the premium you paid for the puts). Your losses are limited because the losses on your assets are offset by the gains in the puts.

When you feel confident in the market again, you can sell your puts if they still have value. If the market is still vulnerable when your puts expire, you will have to decide whether to purchase more puts.

It is important to analyze your expectations for the underlying asset and for the market before selecting your strategy.

When you are analyzing potential option positions, it helps to have a computer program like Option-Aid that swiftly calculates volatility impacts, probabilities, statistics, and other parameters of interest. These programs can pay for themselves with the first trade that they help you with.

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