When Should You Buy Puts? Ultimate Guide for Smart Investors

If you’ve been watching the stock market take a nosedive lately and wondering how to protect your investments – or even make a profit during downturns – you’re in the right place. I’ve been trading options for years, and buying puts is one of my favorite strategies when I smell trouble in the markets.

But timing is everything. Buy puts at the wrong moment and you might as well be throwing money away. Let’s break down exactly when you should buy puts and how to use them effectively.

What Exactly Are Put Options?

Before diving into timing let’s make sure we’re on the same page. A put option gives you the right (but not obligation) to sell an underlying asset at a specific price (strike price) through a predetermined expiration date.

Think of puts as insurance policies for your investments or as a way to bet that prices will fall. When stock prices drop, put options typically increase in value.

There are two main types of put strategies

• Speculative Long Puts: Used to profit from falling prices
• Protective Puts: Used to hedge existing positions against potential losses

7 Perfect Times to Buy Puts

1. When You Need to Hedge Against Market Downturns

One of the most common reasons to buy puts is to protect your existing portfolio. If you own stocks but are worried about a possible market correction, puts can act as insurance.

For example, if you hold $10,000 worth of an index fund but are concerned about a potential 10% market drop in the next few months, you could buy put options that would increase in value if such a drop occurs, offsetting some of your losses.

2. When Technical Indicators Show Bearish Signals

If you’re into technical analysis, certain patterns might signal a good time to buy puts:

• Stock breaking below major support levels
• Formation of head and shoulders patterns
• Death crosses (short-term moving average crossing below long-term moving average)
• Bearish divergence on momentum indicators

3. When Fundamentals Don’t Support Current Valuations

I often buy puts when I notice:

• Price-to-earnings ratios significantly above historical averages
• Companies missing earnings expectations
• Negative growth forecasts
• Deteriorating balance sheets
• Industry-wide challenges

4. Before Major Risk Events

Smart investors sometimes buy puts before:

• Earnings announcements for volatile stocks
• Federal Reserve meetings
• Major economic data releases
• Geopolitical events with market impact

5. When Volatility Is Low

Puts tend to be cheaper when market volatility is low. If you’re expecting volatility to increase (which often happens during market downturns), buying puts during calm periods can be cost-effective.

The VIX index (market volatility index) below 15 often signals relatively cheap option premiums.

6. When You Want to Bet Against “Non-Shortable” Stocks

As explained in the Investopedia article, some stocks cannot be sold short because brokers don’t have enough shares to lend. In these cases, put options might be your only way to profit from an expected decline.

7. When You Want Limited Risk Exposure

One huge advantage of buying puts versus shorting stock is the limited risk. When you buy a put, the most you can lose is the premium you paid. When shorting stock, your potential loss is theoretically unlimited.

Real-World Example: How Puts Work

Let’s walk through a practical example similar to the one in the Investopedia article:

Imagine stock XYZ is trading at $100 per share. You think it’s overvalued and likely to fall within the next month.

You buy a one-month put option with a $95 strike price for $3 per share. Since each option contract controls 100 shares, you pay $300 total ($3 × 100).

Here’s how different scenarios might play out:

Your breakeven point is $92 ($95 strike price – $3 premium).

Practical Considerations Before Buying Puts

1. Time Decay Works Against You

Options lose value as they approach expiration (called theta decay). This means if the stock doesn’t move in your direction quickly enough, your put could lose value even if you’re right about the direction.

2. Implied Volatility Matters

Puts can be expensive during periods of high market fear. The Investopedia article warns that “buying a put in a choppy or fearful market can be quite expensive.” Always compare the cost versus potential benefit.

3. Choose the Right Expiration Date

• Too short: Not enough time for your prediction to play out
• Too long: More expensive and slower percentage returns

I usually aim for 30-90 days for most of my put positions, depending on my confidence and the catalyst I’m expecting.

4. Strike Price Selection is Critical

• Deep out-of-the-money puts (strike price far below current price): Cheaper but less likely to profit
• At-the-money puts (strike price near current price): More expensive but more responsive to price moves

Closing Your Put Position: Sell vs. Exercise

When your put gains value, you have two choices:

1. Sell to close: Simply sell your put option in the market
2. Exercise: Buy shares at the current market price and use your put to sell them at the higher strike price

Here’s the thing most beginners miss: It’s usually better to sell the option rather than exercise it if there’s any time value remaining. Time value is lost when exercising.

For example, if stock ABC is at $90 and your $95-strike put is worth $5.50 (with $5 intrinsic value and $0.50 time value), selling the put preserves that extra $0.50 per share that would be lost through exercise.

Common Mistakes to Avoid When Buying Puts

1. Buying puts just because a stock “seems” expensive
   Without a catalyst or timing, you might be right about direction but wrong about timing.

2. Going all-in on a single put position
   This is gambling, not investing. Size positions appropriately.

3. Ignoring bid-ask spreads
   Options on less liquid stocks can have wide spreads that eat into profits.

4. Holding until expiration
   Time decay accelerates in the final weeks. Consider taking profits or cutting losses earlier.

5. Buying puts during peak fear
   When everyone’s panicking, puts become expensive due to high implied volatility.

Advantages of Puts vs. Short Selling

As mentioned in the Investopedia article:

• Limited risk: Your maximum loss is the premium paid
• Available on “non-shortable” stocks: Some stocks that can’t be shorted have options available
• No margin requirements: Unlike shorting, you don’t need a margin account
• No risk of short squeezes: Short sellers can be forced to cover, but put buyers can’t

My Personal Put Strategy

I’ve found success with a systematic approach:

1. I look for stocks showing both technical weakness AND fundamental concerns
2. I prefer buying puts when VIX is relatively low
3. I typically allocate no more than 5% of my portfolio to speculative put positions
4. I use protective puts more liberally when my portfolio has significant gains I want to protect
5. I set profit targets and stop-losses before entering positions

Final Thoughts: When Should You Buy Puts?

The best times to buy puts are when:

• You need to hedge existing positions against potential losses
• Technical and fundamental analysis points to potential price declines
• You have a specific catalyst or thesis for why a stock or market will fall
• Option premiums are reasonably priced relative to your expected move
• You want to limit your risk while maintaining downside exposure

Remember, options trading involves significant risks and isn’t suitable for everyone. I’ve had my fair share of losers along with winners. Start small, learn the mechanics thoroughly, and consider paper trading before risking real capital.

And always weigh the cost versus potential benefit – as the Investopedia article wisely notes, “be sure to consider your costs and benefits before engaging in any trading strategy.”

Have you tried trading puts before? What strategies have worked for you? I’d love to hear your experiences in the comments!

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