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Chapter 6. Alternatives to Stock Purchase > Rescue Strategy Using Puts

Rescue Strategy Using Puts

You can create a rescue strategy with short puts in place of the purchase of additional shares. Given the previous example, refer to step 3: an additional 200 shares are purchase at $70 per share. Remembering that short puts can be used as a form of contingent purchase, an alternate rescue strategy can be employed to reduce average price and create additional downside protection through put premium income.

The rescue strategy is modified in this example. Let's say that you sold three 65 puts in this situation. This means that if the market value of the stock were to fall below $65 per share, you would risk exercise. Let's also assume that you could get about 5 points for each put, which would reduce your basis in the additional 200 shares down to $60 per share. Your average price on all 300 shares would then be $63.43 ($70.30 on 100 shares plus net $60 on an additional 200 shares).


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