CBOE Holdings, Inc (CBOE): What Insurance Against a Dow (.DJI) Crash Will Cost You

What about individual stocks?
You can buy put options to protect against declines in particular stock positions as well. Often, though, those prices will be even higher on a proportional basis than broader index options, as the risks in a single company are much greater. For instance, if you’d bought put options on Thursday to sell International Business Machines Corp. (NYSE:IBM) for $200 with just a week before expiring, you would’ve paid $2.35 per share. Of course, given the stock’s $17 decline on Friday, that trade would have worked out, as the option closed Friday at $9.75 — more than quadrupling in value.

The safer way to manage risk
Buying put options provides insurance, but it comes at a hefty price. For many investors, the simpler method of scaling back on risk levels in your portfolio by rebalancing when your stock allocations get higher than you’re comfortable with is usually the better bet. But if you really want protection against a short-term move, then buying put options can sometimes be worth the cost.

The article What Insurance Against a Dow Crash Will Cost You originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter: @DanCaplinger. The Motley Fool owns shares of IBM.

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