Options Trading Tutorial

Just bought 2000 shares of Citigroup at 4.70, what options should I buy to protect against a downturn?

I just bought Citigroup at 4.70 and I want to protect myself against a downturn in the stock. I've got an option account, but unsure of what to buy do to my limited experience in trading options.

Public Comments

1. Good to see that you are careful about doing options. Now i could have told you that you are probably in a good position with Citi stock and can even enhance it with some 1-year calls, and you'd love my advise, but i won't. I'm going to instead tell you what i think as a professional investment banker, dealing with big option portfolios on a daily basis. Brokers market options to the general public, without caring how many people get devastated with them. Options are complex, hard to manage, and are in fact a subject to a lot of research, here is something to demonstrate the point http://arxiv.org/PS_cache/arxiv/pdf/0908/0908.1082v2.pdf I recommend you turn to classic investing strategies, keep it within stocks, bonds, ETFs, mutual funds, and don't play something, that greedy brokerages are trying to fool you with. Fool them instead and be safe. Good luck! Moni. http://www.ameri-financial.com
2. Ok, so I read the previous guys answer and he didn't answer your question. Since you just bought 2000 shares of Citigroup you should take two steps in fortifying your investment... 1. Purchase Put options, A Put option give you the right to sell stock. Purchasing 20 put options will be similar to you buying insurace for your stock. You limit your downside to whatever the strike price is. 2. To further lower your cost basis, sell calls. If you believe that the stock will only move to a certain point and not any further, sell call options. Doing so will allow you to collect the premium. If the stock price hits the strike price, great, you''ve made money...if not, oh well, you get to keep the premium! Good luck and if you have any further question feel free to send me an email!
3. If you did want to hedge you would be needing to buy put options. If you were to buy calls this would increase your exposure even more and this is opposite of what you want to do. However, why would you want to buy the shares, then hedge against them?? In theory it would of just been easier to buy less shares... unless you have a reason for needing/wanting to hold 2000 citibank shares. Think about it this way if you are at the casino, and you put 200 on red, you can hedge that bet buy putting 100 on black, but why would you. If zero comes up you lose 300. You would just be better off putting 100 on red initially.