#Long Put Spreads.
This week’s Fundamental Fridays is a portfolio protection episode, and it’s a genuinely useful one for anyone sitting on gains heading into a bumpy fall. Brian Overby uses two real positions from the show’s paper account — a big winner in Apple and a laggard in Netflix — to walk through why a long put spread often makes more sense than simply buying a put outright when you want to hedge a stock you already own. The setup is straightforward. Apple is trading around $337 and has had a great run; Netflix sits near $71 and has struggled since the Warner Brothers deal fell through. Overby starts with the simplest form of protection: buying a put outright at the money. On Apple, a 21-day put costs about $6.90, which works out to roughly 2 percent of the stock’s value for three weeks of downside coverage. That’s not unreasonable, but he points out the obvious catch — you’re paying for protection all the way down to zero, which is expensive insurance for a stock he doesn’t actually think is going to zero. That’s where the long put spread comes in, and Overby explains the logic with a nice insurance analogy: regular insurers sell you a policy, then lay off the catastrophic tail risk to reinsurers. A put spread does the same thing in an options account. Instead of buying protection all the way down, you buy the put at a strike close to the current price and simultaneously sell a lower-strike put, collecting a credit that offsets some of the cost. The tradeoff is that you give up protection below that lower strike, but for most investors that’s a reasonable trade, since a stock rarely craters straight through a well-chosen support level without some kind of bounce or pause along the way. On Apple, he goes out 56 days, past the midterm elections in early November, buying the 335 put and selling the 300 put for a net debit of about $8.90 — only a little more than the shorter, narrower single put, but with nearly three times the duration. He picks 300 deliberately, noting on the chart that it’s held as support even through prior tariff-driven selloffs, so he’s comfortable not paying for protection below a level the stock has defended before. The Netflix example drives home how much the price of the underlying stock changes the insurance math. Because Netflix trades at $71 versus Apple’s $337, a comparable percentage of protection costs pennies on the dollar in absolute terms, and Overby uses a sharp car-insurance comparison — insuring a Bentley costs more than insuring a Ford Taurus, even if the coverage terms are identical. He builds a similar 56-day put spread on Netflix, buying the 70 put and selling the 65 put for about $1.85, capping the maximum payout at $500 minus that cost. Overby is careful to frame when this kind of hedge actually makes sense. He’s not a fan of buying protection right before an earnings report, when implied volatility is already priced up and insurance is at its most expensive — he compares it to buying home insurance while a storm is already forming offshore. Instead, he likes using puts around known macro catalysts with real uncertainty attached, like a midterm election or a Fed decision where the outcome is genuinely a coin flip. That’s exactly the environment he sees right now heading into November. He closes by teeing up next week’s show, which will look at collar strategies — buying the protective put and financing it further by selling a covered call — as a more aggressive alternative when you’re willing to cap some upside in exchange for a cheaper hedge. He also fields a live viewer question about protecting a USO oil position over the weekend, walking through how an open-wing butterfly could serve a similar hedging purpose there. As always, the show closes with the standard reminder about options risk and that nothing discussed is individualized investment advice. |
