1. With the use of Technical Analysis, Amgen is identified to
be poised to break down through a technical support as determined
by a line drawn through three bottoms points, occurring in January
2. Then, in May 2002, the stock options investment
below the support line indicating an upcoming drop to a new,
lower trading range.
3. The stock options investment begins to consolidate at around
$46.00, and attempts to rebound. A protective put can be used
here with the purchase of the stock in case the stock options
investment has a false bottom.
4. Indeed, this level is a false bottom as the rally fails,
and the stock heads lower before the next consolidation level
at point around $41.00. Again, stock may be purchased here with
a protective put.
5. The rally fails again and the stock options investment falls
to around $32.00, before putting a final bottom & reversing.
Again, a protective put can be purchased here to guard against
further downside. At this level, the stock options investment
begins its real rally and rises quickly from this point to provide
an outstanding return from $32.00 to a high of $72.00 in one
4. In September 2002 at a stock price around $41.00, you could
also buy a protective put as the stock options investment pauses
in its uptrend before continuing higher. At this level, the
stock options investment could be gathering up strength for
the next leg of the rally (which it does) or it can become tired
and begin to trade down again.
CONCLUSION: The protective put allows the investor the room
to be wrong by limiting the total loss. Because the loss is
limited, the protective put investor has a staying power not
afforded to naked stock buyers who would feel the full brunt
of the loss.
This ability to play again increases the protective put buyers
chance of being right and therefore more profitable than the
naked stock buyer would be. The Amgen chart is a textbook example
of a stock in position for the use of the protective put strategy.
Obviously, this was a risky trade, but one that could, and in
this case did, provide an outstanding return. This is the perfect
time to use the protective put. The protective put provides
maximum protection in risky situations while allowing you to
have almost the maximum available upside.
So, if you did buy the wrong bottom, the put would have bailed
you out by limiting your downside and saving you enough money
to try again. As you see from the chart, within 12 months of
the July 2002 low of around $32.00, the stock options investment
traded to a high of over $72.00. This profit is more than enough
to have covered the purchase of a few puts.
As stated earlier, this is a textbook case and one that should
be studied for its value of properly showing why and when to
use the protective put.