The Protective Put Strategy can be adjusted to address the particular
lean that the owner of employee stock options
has at a particular
time. (The term lean describes the stock owners perception
of the directional strength of the employee stock options.)
At any given time, an investor could feel that his employee
stock options may go up or down, a little or a lot, or just
stay where it is. The protective put is not a position you would
put on if you feel that the employee stock options you own were
going to consolidate for a while. You would have a loss in the
stagnant lean scenario since the employee stock options made
no gain but you were out $1.00 for the purchase of the put.
However, the situation is different in a bullish lean scenario.
Employee stock options that have the potential to rise quickly
also have the potential to fall just as quickly. Employee stock
options that have substantial potential gain has an equal potential
An investor choosing to invest in employee stock options like
this should have more protection to the downside then a covered
call can provide and at the same time more allowance for a larger
upside potential than the covered call allows.
This is a perfect time to use the protective put strategy. The
purchase of an out-of-the-money put will be a relatively inexpensive
investment but will provide the kind of results that will best
fit a bullish lean.
You will have maximum downside protection with all the room
you need for your employee stock options potential run up. Of
course, this comes at a price. You must pay for the protection
and freedom this position can provide.
The protective put can also be used when you have a little bearish
lean on your employee stock options. Lets say that you own
employee stock options that have taken a very nice run up. The
employee stock options have gotten to a point where you think
about possibly selling and taking your profits but are afraid
to because you feel it may still run up more and you will not
forgive yourself for getting out too early.
Instead of selling the employee stock options and missing out
on the continued run, look into buying a put for protection.
It will allow you to continue your capital appreciation as the
employee stock options
trade up while limiting your loss to
a fixed, known amount.
In cases such as this one, the purchase of an at-the-money or
slightly in-the-money put will ensure you get a good sale price
if the employee stock options head down and allow you ongoing
profit if the stock continues up.
Of course, if the employee stock options stay still, you would
lose the amount of premium you spent on the put. If the employee
stock options go up, it would have to trade higher than the
amount you spent on the put before your long stocks upward
movement starts to make you money again.