To The Moon

In times of market volatilities, options can be useful hedging tools to mitigate adverse price movements of underlying stocks in our investment portfolio. I particularly like a put option during a market downturn as it gives its holder the right but not the obligation to sell an asset at a predetermined price before its expiry.

Hence, a stock investor who is concerned with downside risk for the stock in a bear market could buy a put option for the underlying stock as an insurance against the share price falling below the strike price of the option. Although there is a price to pay for buying the option, I would construe that fee as an insurance premium that one will have to pay for buying an insurance against potential liabilities.

On the other hand, if we have a target price at which we would like to acquire a stake in a company, we could sell a put option with that strike price for the stock and earn a fee for writing the option while we await the stock price to drop to the strike price. This is not unlike structured notes such as equity-linked notes marketed by banks, but their yields are typically lower compared with selling options by ourselves, as the banks will have to make a profit / earn a commission. Selling options by ourselves also offer us higher flexibility in the choice of the underlying assets, strike prices and expiration dates.

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