Randall Liss Analysis: How to Use Put Options for Downside Protection

Randall Liss reviews using put options as hedges
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In Today's Traders Exclusive, Randall Liss reviews how a put option can be used to hedge against equity declines. The same way insurance protects an indvidual from the risk of a fire burning down their house, puts act as insurance against a meltdown in a stock's price. Puts can also be used as speculative bets on market declines. This morning, the market offered an opportunity for a 1:4 risk/reward trade on the SPY. You could have bought the January 185 put (a 5% drop) and sold the January 175 put (a 10% drop) for a $2 debit. The most the trade could payoff would be $10, thus providing a nice trade if you believed another leg lower was shaping up.