Put Options: Protection From the Next Stock Market Crash?

With the market teetering, many investors are looking to protect themselves. Can put options get the job done? Find out here.

Jan 18, 2014 at 11:42AM

Stocks soared in 2013, but that has many investors on edge about the prospects for a big correction or even a bear market in 2014. If you want to protect against a big stock market crash, put options can give you the protection you want -- but is it worth the price you'll pay?

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at put options and how they work. Dan notes that put options are basically similar to insurance policies, in that you pay an upfront premium for protection from falling markets. If the market does drop, then you can exercise the option and reap benefits. If the market doesn't drop, then you'll often lose your entire premium. Dan points to options available on indexes like the S&P 500 (SNPINDEX:^GSPC), ETFs like the SPDR S&P 500 (NYSEMKT:SPY) or the SPDR Select Financials (NYSEMKT:XLF), as well as individual-stock put options. Dan concludes that options can be pricey and aren't worth having at all times, but they can provide short-term protection when you think you need it most.

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Fool contributor Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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