GM Chart Protective Put Example #4 For Incentive Stock Options
By Options University
A Cost Effective Insurance Policy For Incentive Stock Options
NOTES ON GM General Motors
Protective Put & Incentive Stock Options
1. After trading incentive stock options in a tight range for
a considerable period of time with low volatility, GMs volatility
spiked in early December 2003 and the incentive stock options
gapped open considerably higher, followed by another breakout
gap opening several days later.
2. This second gap opening forced the incentive stock options
up through a previous resistance level, as the incentive stock
options broke out and began a new, higher trading range.
3. The incentive stock options then advanced five of the next
seven trading days with bigger intraday ranges than average
during the previous 12 months, indicating increasing volatility.
4. The initial GM breakout, when the incentive stock options
traded through $44.00 and quickly proceeded to trade up to the
$54.00 range in less than one month, represented a 25% return
in a very short period of time.
Conclusion: GM is a perfect example of an opportunity to use
the protective put strategy to provide protection against a
false break-out when buying incentive stock options on a technical
In this case, GM had been trading in a lower volatility pattern
for several months, which would have kept the incentive stock
options premiums down. This would have allowed the investor
to purchase the put at an advantageous price.
With the protective put in place, and at a relatively inexpensive
price, the investor could ride the break-out with patience and
confidence, with limited loss and controlled risk.
Even though these incentive stock options were in a rapid uptrend
after breaking out of its previous trading range, and the protective
puts purchased would have expired worthless, it still would
have been a good idea to put on this protection in case the
incentive stock options pulled in.
Gap openings tend to get filled at some point before proceeding
higher, and in the case of a rapid sustained rally, there is
usually some type of pullback when the incentive stock options
In this case, the puts would not have been profitable, but would
have provided the necessary protection in case the rally failed,
or temporarily retraced.
We wanted to show this example where the puts would not have
been profitable, because you never know where the incentive
stock options are going to go. But even though the puts would
have expired worthless, the rise in the incentive stock options
price would have clearly offset the cost of these puts.
So again, the protective put strategy here would have provided
a cost effective insurance policy against the incentive stock
options pulling back or a failed rally.
these secret option trading strategies that will have your friends
calling YOU 'the options expert' Click
About To Learn Secrets Most Traders Will Never Know About Profitable System Trading..."
Inside you’ll learn...
to design a winning system from scratch and exactly what
to do to supercharge your current stock trading system!
one ingredient you literally "Drop" into your
stock trading system that can triple your profit!
to use “secret” money management techniques
to minimize your risk.
tools the professionals use and how you can get huge discounts
(charting software, data, etc).
you'll also get a FREE copy of David Jenyns’ complete
Ultimate Trading Systems Course…
Just enter your name & email - then click the “Click
Here For Free Instant Download!” button. (All information
kept 100% confidential). The download details will be
emailed to you immediately.
take your privacy very seriously. My
personal privacy guarantee to you. I respect your privacy
and will never share your email address with anyone. You can
easily unsubscribe at any time. View our Privacy
Policy - David Jenyns Founder of www.ultimate-trading-systems.com
copyright 2005 Incentive Stock Options