Buying Index Puts Strategy - Profits through price losses

Strategies for trading various forms of investment come in a wide variety of forms. One of the strategies that is quite popular and often used is the buying index puts strategy. If you want to use this strategy, you always assume a falling index. However, the index value that is considered is an average of all positions within this index. This average provides a view of the current situation, which can be seen as a point of view for placing trades.

What may sound somewhat exciting and difficult at first glance will prove to be quite feasible at second and third glance. To make sure that this is really the case, we at Forexaktuell.com would like to introduce you to the Buying Index Puts strategy in more detail and explain all the advantages and the approach to this strategy. We would also like to name brokers who have this strategy in their portfolio and where you can become active in this regard.

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This is what the Buying Index Puts strategy is all about

Trading in securities of all kinds always involves a certain amount of risk. But you will find risk in everything that makes up your life and accompanies you. From your job to your private life, you will always find risks that can make your life very difficult from time to time.

When trading securities, the risks clearly lie in the potential loss. This is always an issue if you have speculated and therefore perhaps not only lose your stake, but also additional money. This is annoying, but ultimately has to be recognised as an experience.

The Buying Index Puts strategy is a little different. Here, the possible loss can be limited to the option premium. This means that the maximum you can lose is your stake. This ensures that a good ratio between profit and loss is created and you don't have to worry about being completely ruined at some point.

With the buying index puts strategy, you as an investor profit from an index crash. The profit margin cannot be predicted in advance, as it is always necessary to see how the price will develop. This keeps the tension at a very high level until the very end.

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How the Buying Index Puts strategy works

As with other forex promotions, there is a leverage for index puts that can be used for each trade. As a rule, this leverage will be between 100 and 400. Depending on the size of the index. If required or desired, this can also be even higher.

Two further factors come into play in the buying index puts strategy. These are the time value decay and the volatility of the underlying asset to be traded. You as the investor must determine the range within which the ratio moves. If possible, you should do this before applying the buying index puts strategy. To do this, you simply need to divide the current price changes in the index by the warrant.

The Buying Index Puts strategy is a hedging tool. This is the case as long as you as an investor hold shares in the stocks represented in the index. If this is not the case, experts refer to it as a speculative strategy, as is the case with binary options, for example. With these, as is well known, you only trade in the underlying assets and not in the pure shares behind them.

If you have decided to buy Dax securities, you will certainly align your strategy to the Dax accordingly. Should it then happen that the entire index of Dax securities you hold falls, the buying index puts strategy will act as a buffer and minimise the loss in value of the shares you have bought.

However, the ideal scenario looks somewhat different. In this case, you have shares in companies in your index that do not simply disappear from the stock market overnight. There is no time limit for buying index puts. You should therefore always plan for the long term and organise your strategy accordingly.

The combination of shares and index puts

Low interest rates are forcing more and more people to use alternative forms of investment as a form of retirement provision and investment. In return, they are willing to take a higher risk than they would, for example, if they invested their money in a capital-forming insurance policy. This is because insurance does not promise a worthwhile return. There you can be happy if you get the money paid in at the end. Investing money on the stock exchange or in securities that are traded outside the stock exchange always involves an increased risk. However, there is also the chance of a good return. And this chance is not necessarily small. With a little skill, a lot of patience and sufficient knowledge about trading, a lot can be achieved.

Even if there are always crashes on the stock market, which can result in high losses, alternative forms of investment in shares and securities will never lose their appeal. Especially not if the Buying Index Puts strategy minimises the risk. It is true that money always has to be invested first. But if the shares are hedged with the help of binary options, this can be seen as reinsurance that will always prevent a massive loss. If the value of the shares rises accordingly, then the costs for the index outs can be optimally cushioned. However, if the shares do not perform optimally, you can be sure that you will not lose your investment account or be ruined in any other way.

In addition, it is not obligatory to place a put. You can also use the chart technique without securities from an index and bet on a falling price. If you are lucky and the stock market is shaken by a crash, this crash will probably be so severe that you will make a very good profit. If you wait for the right moment and hold put options, you can become infinitely rich in one fell swoop. All you need is a crisis or a major disaster that has a negative impact on the market. 11 September, the announcement of Greece's bankruptcy or the earthquake in Fukushima would be such crises or disasters that cause the stock market and other markets to shake. And while other investors lose a lot of money, you can make a lot of money with the right strategy and a little bit of luck.

Worthwhile examples of index puts

There are various forms of index puts that you can use. The most popular form is the classic warrants, which are always linked to a time value expiry. These have a direct link to volatility, which makes them even more interesting. With this form, however, bear in mind that nobody can predict exactly if and when a time value expiry will occur. In other words, nobody knows exactly when the price of classic warrants will fall. It is therefore not certain that you will actually make a profit in the end.

If you don't like this uncertainty, you can work with knock-outs. These do not have a time limit and therefore have the advantage of being easy to calculate. However, the weak point of this form is the knock-out value. When you buy the securities, you set a threshold value that should not actually be exceeded. If this happens, you have lost the option. It simply expires and your stake is lost. However, if the value remains below the threshold value, you have won and can look forward to a nice return.

The advantages and disadvantages of index puts

Index puts offer an excellent cushion against a fall in value. However, only if the investment has been calculated very precisely in advance. If this is the case, it is definitely worth using this strategy once.

With index puts, you always have to think and plan for the long term. You will not get rich overnight. Good nerves and, above all, patience are the basic requirements for this strategy. In addition, the ratio between the index puts and the calls must always be right so that the hedging cushion can also be utilised. Also bear in mind the fees and financing costs that are imposed on you. In the end, they must also be covered somehow so that the buying index puts strategy does not turn into a losing trade.

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Conclusion

The Buying Index Puts strategy is not always so easy to understand and should therefore only be used by investors who are really familiar with securities trading and have already gained a lot of experience. Otherwise, the Buying Index Puts strategy can quickly turn into a losing trade, as costs are incurred that must be borne by the investor in any case. And in the worst case, these costs can be very high.