Where should I put the strike price of a put to protect daily gains?

Question

Trading stocks.

Answer 1

Are you talking about placing a trailing stop to help protect profits, or buying a protective put?

In general, people don't buy puts to protect "daily" gains. However, if you want to help shelter your gains, you have several options.

1) Sell part of your position to lock in profits.

2) Buy a put realizing that time decay will work against you and if the stock does not move down, your cost of the put would reduce your profits. Depending on your Risk averseness, you could buy an in the money put in order to pay less "premium. Realize however, that this put will now decay and decrease in price as the stock moves higher, offsetting a greater % of your subsequent gains that you might otherwise get.

Buying an out of the money put, while not eating up as much of your additional gains, will give you a little less protection against pullbacks (meaning you protect a smaller % of your gains already gained).

3) Sell a covered call against your position. If you like the stock you own and would own it anyways, you can sell an out of the money or near the money call to offset pullbacks. You get additional income while sacrificing a little of the upside profit potential should your stock move past the strike price of the call you sold. However, as the seller of the call, you get the premium for you, as well as the time decay.

Hope that helps!

Answer 2

The answer above many not be right since, buying put to protect the underlying security will dry up your profit you gain on the stock by way of premium you pay to purchase put. It won't be much of a protection as you can see.
If you feel that the market has gone above a strike price that you feel is the inflection point then buy the put at that strike price. You can get this using Implied Volatility calculation. If Implied volatility passes Statistical volatility then though the time is bad for trading due to the high volatility, but this signal an inflection point. Implied volatility is average of two implied volatilities of last two days. IV=Market price - Low price/High + low/2. Statistical volatility is High - low/High + Low/2. I think this you understand how it happens.

Answer 3

Most of the time you are paying more for puts, than the amount the stock may go up, therefore lossing money.

Use stop orders, find in a chart a day that the stock had a big but not outstanding downside movement (don't use gray tuesday), and place the stop this quantity below current stock price.

Answer 4

Obviously, puts are more expensive the higher the exercise price.

The answer depends on your expectations.

If current stock price is $25, and you want to set up a protective put to save nearly all of your gains, buy an option for $25.

If you want to save some money on the option but are willing to take a small loss, buy one at $22.50.

Etc.