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Good Afternoon All,

Quite frankly I'm stumped. I am aware of a covered position under normal circumstances, however in this particular situation there are less than 100 shares and I'd really like to protect this investment.

Scenario: I'm currently long 50 shares of xyz @700 and an additional investment to bring it up to 100 shares doesn't make sense in the current market. If I write a put (as I would prefer to do) I would find myself short 50 shares.

Perhaps I'm missing something or have analysis paralysis here, but i'm for a loss.

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  • Why are you thinking of writing a put? What kind of hedge are you considering? – Chris W. Rea Feb 11 at 19:52
  • FYI writing (selling) a put would make you long an additional 100 shares. I think you mean buying a put. – D Stanley Feb 11 at 19:52
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Selling a put means that you are obligated to buy 100 shares if you are assigned. That isn't hedging. It's increasing your long exposure.

To hedge, you would buy a put. If you did so, your long shares would be protected (not covered).

Put protected long stock is analogous to buying insurance for your house. The premium is the cost and the amount that the put is out-of-the-money is the deductible. If you want a zero deductible, you pay a higher premium. If you accept a $500 deductible (OTM strike price), the premium is less. It costs even less for a $1,000 deductible (deeper OTM put).

There are alternate ways to hedge. If you want to spend less money on protection and you are willing to accept less overall protection, you could buy a bearish vertical put spread. Like above, more protection (wider spread) costs more. This vertical would only be a partial hedge and would not help much if share price cratered.

If you owned 100 shares and you were willing to cap your upside gain, you could sell an OTM call and use the proceeds to buy an OTM put. This is called a long stock collar and typically done for little to no cost, depending on the strikes chosen.

In the end, it's a decision of risk and reward. Reducing risk costs dollars (buying a put) or it is obtained by opportunity loss (selling the call in the collar).

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No, there is not a conventional way to buy a non-standard option contract; it would have to be over-the-counter (OTC) and you would have to find the counterparty yourself (or through your broker), which introduces counterparty risk.

However, you could still buy a 100-share put option contract if all you're wanting is downside protection. If the stock goes below the strike, you could buy an additional 50 shares at the lower market price to fulfill the put, making additional profit from the put.

Or you could sell the put just prior to expiry, the profits from which would make up for the additional loss you suffer by the stock going below the strike.

The main downside is that the initial put would cost you twice as much as the protection you need; you can decide for yourself whether the protection is worth it. Or look at alternate hedging strategies as bob suggest that have a lower upfront cost.

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  • Very interesting! I apologize for my limited knowledge in the options arena, as I am still in the process of better educating myself in it. Thank you guys for your patience and generous response to my question. – Jason A Feb 11 at 21:01
  • So from what I've gathered, is that acquiring protection for this particular stock is more capital intensive than expected a perhaps not an option at this point. the current profit is 20k but in even the vertical spread will cost just outside of 10k. Continuation of my question. whats the perspective on 15 to 20 strikes OTM put? – Jason A Feb 11 at 21:11
  • Protective puts at strikes 15 to 20 strikes OTM will provide poor/little protection (look at the delta of the option to see how much it will be initially). If you post the stock symbol then I/we might be able to offer more concrete suggestions. – Bob Baerker Feb 11 at 21:36
  • Thanks Bob, yes the symbol is TSLA I have had it for sometime, but have been in and out of it over the last year. I plan on staying long now, hence the question about protecting it. I was exploring the $810/$730 spread or buying the put as you had mentioned. However buying the put would cost around 24k. my present gain is 23k. – Jason A Feb 11 at 22:07
  • Unfortunately, TSLA has a fairly high implied volatility. The higher the IV, vertical, the more that it inflates the premium of higher strike than the lower strike. IOW, verticals become more expensive as the IV increases. And although $23k is a nice profit, it's not much considering the price of the stock and therefore, vertical hedging will eat up much of it should TSLA rise and in this case, all of it. Is your profit worth 80 points of protection? Hedging principal rather than profit will cost less. If you're not married to buy and hold, I'd take a look at the collars. – Bob Baerker Feb 11 at 23:00

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