Does Buying Puts To Protect Our Investments Work? (Hint: Absolutely Not)


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Oh. Hello. I didn't, see you there, welcome. Guys I got an awesome one for you guys today in fact this, is probably my favorite video, that I've done to date so far so make sure you pay attention one. Of the things that you hear about on financial, media on the, Internet this thing is in my way on the internet um. On Jim Cramer on Bloomberg all those things when stocks are going down is people. Are buying protection. As a means. To mitigate. The losses if, stocks go down now I don't know I have any of you tried it but I have and I certainly have my opinion, on it so what we want to figure out is we, don't we just want to listen to what they say on financial, media we don't just want to listen to what everyone. Is saying we want to go in there and we actually want to dig through the numbers so what we did in this video and you're gonna learn here in a second is we're gonna go ahead and do is we're gonna go ahead and we're gonna figure. Out if buying, puts. As a means. To protecting, your portfolio, is a profitable. Strategy, or not and if it is exactly. The right time to do it now this is kind of a cool and I'm really excited about this because again this. Is something that you guys have heard of before, this is something that has been talked about financial media but no one has actually taken the, ten minutes to go in there do, a back study like I did to figure out if it is the right thing to do so what we're gonna do is we're gonna go talk about what it is and then we're gonna go do a study during. The financial crisis of 2008, to seeing if buying puts was, the right thing to do in that time so strap on guys it's gonna be an awesome one I'm super excited I'll see you guys back. Inside. The computer, we, are back we are inside, the. Computer, and now. We're gonna get into it now we're gonna talk about and answer. The question does, buying puts to protect our investments. Work now again this is what you've heard before when. They talk about. Portfolio. Protection. Investment. Protection. 99. Times out of 100 and the. Only reason I'm not saying a hundred times out of 100 because nothing is impossible but. 99, times out of 100 the. Recommendation. To protect, a portfolio, is the purchase. Of put options. We're. Gonna get into if that works if it does why, does it work if it doesn't why, it doesn't work and, we're really going to get into invent it out remember guys we, don't just take what others say and just automatically, do it because. Some, rich person said to do it or some big-time investors said to do it in. Other videos we, have taken exactly, what the top 1% of investors, doing the Warren Buffett's the world and kind of debunked, what they were saying now, those, same investors, recommend. As it. Means to protect the portfolio, the, buying of good options. Let's. See if that actually works, let's, see if it's the right thing to do here and again guys on the left just so everyone knows if, you never see me talk, at a at, a conference if you never see me in person never seen any of my videos like. This, is the best I've ever looked in my entire, life my, skin is glowing my hair is super thick big smile I don't look like that the, lady who did these photos must have photoshopped, them but, anyway let's. Dig into it does buying puts to protect our investments actually work I'm super excited about this one so again guys let's take it a step, further or, step back first buying. Puts there, puts her or a form of an, option, contract. Right. An option, contract is just an agreement to, buy or sell 100. Shares of stock for. Every option contract, at a predetermined, price at, a predetermined date, so. Puts our form of an option contract that when purchased, benefit. From, a drop in the prices of an underlying stock, so, I'm going to go into the trading portfolio now and I'm going to SP why SP.

Why Is the SP, 500 index. ETF. And we're. Going into the options change we see calls on the left and puts, on the right we, will see a benefit. In, the. Price of the puts if we buy puts and price. Of the stock goes down so, I'm going over to the 265. Put, expiring. In five days and I'm, going to click, on the, ask the, reason I'm going to click on the ask is the ask is the lowest, amount that someone is willing to sell for right. And since we want to buy it there has to be a seller at the same time so, we're going to go ahead and we click on the ask and, we. Have bought. Or. Analyzed, buying, an actual put so, you see here we said puts are a form, of an option contract that when purchased, benefit from a drop in prices of an underlying stock we, have simulated, here a five percent, drop in the stock, and we, see we we make about eleven, hundred dollars by purchasing, this, foot so that's what I put is. And. They can be seen as a, way of reducing losses. Of a stock goes down because. The value, of the put will, increase, as the, value, of this stock, decreases. So. Let's say we so. Let's simulate, buying. 100. Shares of SP y and at, the same time. Buying. A, put if we just buy a hundred shares of SP Y and SP. Y goes down five percent we, lose about thirteen, hundred dollars but. If we go ahead and buy SP y and at the same time we're, going to go ahead and buy a put you, can see we go from losing. Thirteen. Hundred and thirty, three dollars to. Only losing about two hundred and sixty three dollars the reason for that is because the, value of the put will, increase, as the value of the stock decreases. And as, you can see as. The. Stock goes down more and more and more and more the, value, of our, loss doesn't. Even get any greater, because. Again the value, of the put will increase, as the value of the stock decreases. So this is why people. Recommend. Buying. Puts as a way to, reduce losses when stocks go down it's. Because they typically, trade one for one at a certain, point we, can see here again guys if. We. Just buy stock and the. Stock goes down five percent we lose about thirteen hundred dollars but, if we buy stock and we, go ahead and buy the put if the. Stock goes down five percent we only lose about two hundred and sixty three dollars but, if the stock goes down fifty, percent we, only lose two hundred sixty seven dollars so it's about the same again. So that's the way you can quote-unquote limit, your downside, based, off of buying puts way, to protect, your investments, and for, this reason obviously investors. Purchase puts in order to protect their downside and know, that. Their downside, is limited. Now. When do we want to buy these puts, as a way to you. Know mitigate, our losses as a way to protect our downside will the price of options, which.

Include Put options from others calls and puts they, are inflated, when the VIX goes up and are, reduced as the VIX goes down now we're, not going to get into what the VIX is here I will put a link below in the description in, this video we, created a video about, what the VIX actually, is again it's not what you think it is so if you want to get into what the VIX actually is I'll put a link below in the description you, can go ahead and go wild it should be pretty eye-opening to, all of you but as, the. VIX goes up the, price of puts go up as the, VIX go down the, VIX of the, price, of puts, go down and the same thing for calls alright so logically, if we, benefit. When, we buy puts if we benefit, from, the price of the put going, up we. Would like to purchase it when, the VIX is down so logically, this means we would want to buy puts when the VIX is low so, that they can increase proportionally, to the amount the stock goes down when, prices sell-off in the VIX Rises however. The. Concept, of buying puts when. That when the VIX is down typically. Does. Not happen. And again. I'll link to a video where we talk about that as well we talk about both these things right. The hope is that, the puts we purchase will prevent us from major, losses, when. The market has a major, sell-off who, would not want to, protect, themselves from major losses when the market goes down I know I would help I know I'd love to do that, now. In order, to figure this out the, example, we used right here is awesome. Is, great. Remember. If. The. S&P, 500, were. To go down not, 50%. Five. Percent just by. Buying a hundred shares of stock outright. We. Would lose about thirteen, hundred and thirty three dollars however. If we, bought a protective. Put to protect our downside, a five percent drawdown in the S&P 500 we, resolved only a two hundred and sixty three loss so a thousand, dollars less by, buying puts now that. A really, great example. However. Does. It really work. When. Put into, practice, does it really work live so, we went ahead and we did a study to figure this out now what if you're new to this channel you'll, notice that a lot of our. That. A lot of our videos a lot of our content, has, to do with pure numbers so we like to remove a motion we'd, like to remove other people's opinion, out of, what we think and we, like to just inject, studies and then based off those studies. Make. Trades. Make investments, execute, on strategies, with the confidence, that the numbers support what we're doing so. What we do is we did a study from 2005. To 2002. Ten so. The reason, we did these years, is. Because. 2008. The, end of 2007. All of, 2008, and the beginning of 2009, was. A horrific, financial. Meltdown a, horrific. Financial. Meltdown. Horrific. In. Theory, buying, puts, should. Be its most profitable in that, time it. Only makes sense because remember. Financial. Meltdown stocks went down about 50%, again. We profit, from puts from. Buying puts if stocks go down so. We want to see in the, best case scenario was. Buying puts a good idea. So. This is why we did 2005, to 2010, so that's five years of data and what. We did was, we did this in SP y so SP Y is the index, ETF, for the S&P 500 it is, the most liquid product. In the world and the, numbers for these studies are really. Easy to get so. What we did was every month we. Purchased, one put, 5%. Below, the. Current price of the stock, so. Right, now. The. Price of the stock is 265. 51, and we, purchase, we would go ahead and purchase do 252. Or if. They have a 252 and a half they do put, in this, case for, about 46. Cents. And we did that every single, month. For those five years and, we, did it in the monthly, expiration, cycle, closest. To 30 days for them expiring so, right now. This. Would not be the monthly expiration cycle right now the closest, monthly expiration cycle, to.

30 Days would be these right here the January 19th so, let's go find the 252 and a half put. Here in this case it's going to be the 253, we're, gonna go ahead and buy it for, about 72. Cents, so that is what we did for those five years and, then, we held the put until it expired and we. Calculated. The P&L, from. The protective, put we purchased now the, goal would be to, have the P&L, from the puts, make. Money right, because they make money that would be a way we would, know for sure that, we would have benefited, from buying, puts as opposed to just owning the stock outright right. And we have every, expectation in, the world we. Have every expectation in, the world that. This. Would work remember 2008, was a massive. Financial crisis, it was really really nasty so. This should be overwhelmingly. Positive, to, the camp, of buying puts so, let's see what it looked like and here. Are the results again remember, 2005. 2006. 2007, 2008, 2009, let's take a look at what that actually looked like here let's. Go to the charts. Spwhy. 2005. To. 2002. The beginning of 2010, so this is what we were looking at right here for the first couple years 2005. 2006, and even 2007. We, have every expectation that this, would not be a profitable, strategy, as stocks went up however in, 2008. We, would expect to see a massive. Profit in terms, of buying protection as a way to really mitigate, some sort of downside, risk let's. See what that ended up looking like so, every, single year. Buying. Puts. 5%. Below the. Price of the stock whether. The stock went, up, like. It did in 2005, 6 & 7 or down. Drastically. That like I did a 2008, did, not work. It. Didn't. Work in, two, thousand five six, and seven, there. Was not one put. That, expired, profitable. In. 2008. In 2009, there. Were puts that did expire profitable. However. However. The. Losses, were. Greater than, the winds again. We're, talking about 2008. We're, talking, about a, 50%. Loss in stocks a, 50%. Loss in stocks. Yet. No. Money is made, buying. Puts. Yet. No extra. Money was. Saved from. Our long stock positions, buying. Puts. None. Absolutely, none. That. Is some crazy stuff, while. We did have some big winners in 2008. We had a 624. Dollar winner remember this is on one contract, in 2009. We have a 528. Dollar winner. However. Over. The course of the, year, in 2008. We, were still a loser and, 2009. We were still, a loser. Does. Buying puts to, protect our investments, work no. It. Does not work at. Least, when we think about buying puts once, a month five percent away from. The price of the stock and doing. It in the, worst financial crisis. Since. 1987. It. Does not work the numbers, do not support, it this. Is what we're looking for 5%. Below for, 30 days that's. It we're doing it again in horrible. Financial. Conditions. Horrible. Financial conditions. It. Still does, not work it still. Does not work. Yes. That's right it is better to just, not buy puts at all even. In the worst of financial.

Conditions, 2008. It would, have been better and, you. Would have lost, less. Money because you didn't make any money if you were Long's, you would have lost less. Money, just. Owning the stock and never buying puts now, there's a few reasons why. This is, the case you, know what's the catch. In. Order for. A protective. Put to. Be profitable. The. Price of the stock must. Be below the. Price of the put plus. The. Price paid for the, put so. In our example of, buying, one put 5% below this. Put is not, profitable. Until. It gets below. 253. Plus. The, amount we pay for, the put. So. In this case it, would have to be below. 252. 28. For. It to be profitable. Because. We are paying a credit, which gives we're paying a debit we're, actually paying. Money, for. This. So. It adds to, it. If. The. Stock were to, if the, stock when, this put expires, were to be at, 253. On the dot the, value, of this put would, be zero. Thus. We would have lost the full 72. Cents, on. Buying. The put and we, would have lost the. Full. We. Would have lost the full thirteen hundred and thirty-three dollars on buying stock again. Because, buying, puts. Makes. You add even a greater disadvantage. Because not only do, you have to get down to the strike price or in, this case you, have to get down to two fifty - or. Excuse me - fifty three but you have to get beyond, the strike price by. The amount, that you pay in, debit. For, the put. So. That widens, out and make. It less likely that, you will reach that, point, right. So this increases, the price the. Stock needs, to go down because. Again the, stock needs to go down to. The price of the put. Plus the. Price paid for the, put. So. If we go back, to. What it looked like back in really. Bad financial condition, so let's go to 2008, March of 2008, was really really bad let's. Go for, let's. Go to s py March. Of 2008, was very very bad if we, went to, these, monthly expiration cycles. And. We. Said ok the price of stock was 133. Times. Times. 0.95, the. 126. Put the 126. Put is 2, dollars and 35, cents so, not only with the price of s py have to go down, 5%. But it would have to go down another, 2 dollars and 35. Cents just, to break even just. To start making one, penny on the put and that's, why buying. Protective. Puts as a means. To protect your downside does, not work it's. Because you are paying a debit for those puts so not only does the price of the, stock have, to go below the price of the put but, it also has to go below the price to put plus, the, price paid for the put. So. What are some of the takeaways buying. Puts as a means, of protecting the downside, of long, stock positions, even. In terrible. Financial, conditions. Terrible. Financial, conditions. Terrible. Does, not work, it does, not work. They. Do not, turn a profit and do, not really reduce, losses in fact they, increase, losses, that's right they increase. Losses, buying, puts. During. The financial crisis. Increased. Losses it did, not decrease, losses, at all. So. Buying. Puts as a means, to protect the downside of a stock position does, not do, what it was intended to do and only, adds to losses and does, not prevent, them guys this is a really, really big deal do, not buy puts as a way to protect, your downside do, not do it. Won't work now and it, didn't work in the worst financial conditions, of our. Generation. But. That should have been pretty eye-opening to, you guys remember, probably.

For Your whole investing, career you. Have heard buy, puts, as way, to mitigate downside. Buy puts as a way to protect your long, stock, investments, but, when we dig through the numbers and when, we go back to horrible. Financial conditions, which, was the financial crisis, the credit crisis of 2008, it did. Not work, if. It. Doesn't work in the worst, financial conditions. It's not going to to work in average, financial conditions, or even okay. Financial, conditions or good financial, conditions buying. Puts as a means, to protect your downside does, not work they, only add two losses they don't ever increase. Losses, you might get a one-hit-wonder where, one put all of a sudden makes a lot of money but over the long run right, over a full, year they do not work guys do not buy puts, as a means, to mitigate. Losses do not buy puts as a way, to limit your downside they only add to your downside thank, you guys for tuning in if. You have any questions hit me up in the comments below I'll see you guys in the next video.

2017-12-17 23:35

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Did you investigate with slightly in the money put instead of slightly out?

No we have not, Jimmy. I have added this to the queue of my data team and we will work on it over the next few weeks.

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