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The Synthetic Call

Question:When we buy the stock, we want to ensure against it falling fast, so what can we do about that?
Answer:Buy a put option as well. The combination of buying the stock and a put is known as a Synthetic Call.
Question:Which exercise price for the put should we choose?
Answer:It depends on your appetite for risk. Generally you should buy the puts one or two strike prices Out of the Money—OTM (that is, below the price you paid for the stock).[1] If you are highly risk averse, here you’d choose the $25 strike price, but if you’re only concerned about a level of support, say at $20, then you’d choose the $20 strike put.

[1] Remember that for puts OTM will be below the current stock price and for calls, OTM will be above the current stock price.

With respect to American stocks, remember that you’ll need to buy 100 shares for every put option you buy. In other words, you’ll need to buy one put contract for every 100 shares that you buy. Remember that every US stock options contract represents 100 shares.


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