Option Trading Strategies

Stock option strategies – hedging?

hi,
I am new to stock option trading. my question is when ppl say you can hedge of buying a stock and buying a put option( so if stock price go down you can recover the loss by price gain in put option ) or vice versa.. but stock prices and option premium dont move $ to $..

Hedging by purchasing a protective put is simple; it’s a little like buying insurance. The put contract limits how far the value of that position can fall. If the stock price falls below the strike price of the put, the value of the put increases to make up for it. So the value of your overall investment cannot fall below the strike price minus whatever option premium you paid.

Remember that the option premium has two parts: the intrinsic value, and the time value. When the put is in the money, the intrinsic value is the difference between the strike price and the price of the underlying stock; under these circumstances, the intrinsic value does in fact move $1 for every dollar that the stock price moves. The time value of an option depends on the volatility of the stock and how long you have until expiration.

In my opinion, protective puts should be used sparingly. They really won’t help you make money, but will help limit losses for the duration of the contract.

Creating Good Options Trading Strategies