How Options Can Save You from Disasters

By now, most investors and traders know what happened to LinkedIn (LNKD). After the company reported earnings, the stock plunged by 40%, smashing the portfolios of pros and amateurs alike. LinkedIn has a history of booms and busts after announcing earnings. In the future, before any stock announcement, there are two actions you might consider:

  1. If you are long a stock, you can buy short-term (weekly) put options for insurance. If the stock plunges (as happened in this case), the put options would reduce (but not eliminate) the pain. The downside is that puts on some volatile stocks are pricey, especially if you choose a long expiration date. 
  2. Instead of being exposed to a large and expensive stock position, replace the stock with call options before a major news announcement (assuming you are long the stock). With LNKD, although you would have lost the entire amount of the cost of the option, instead of losing a small fortune, you may have lost a small amount. Example: Instead of losing $8,000 with 100 shares, you might have lost $400, the total cost of the option. 

In a bear market, put options are your friend. Use them for protection or for speculation. For more information, read my book, Understanding Options 2E (McGraw-Hill).

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