Is it smart to buy put protection ?

edmundfitzgerald

Let's say you have 600 ozs of silver averaged in the $18 range. Would it be wise to start buying some small put protection here ?
Would buying puts from the $45-$52 oz range be wise, or totally foolish ?

piecesofme

Given the details provided, I would do it, but wouldn't buy a whole lot. And they would be way "out of the money" and at least 4-6 months out.

gecko109

Why use puts to hedge? If you really want to protect yourself from a downswing, cash out 1-2 hundred ounces and lock in your profit. Then you have some dry powder to really take advantage of a serious correction.

RedTiger

I vote foolish. What is the point? If a person knows which way prices are going they don't need to hedge. If a person thinks prices are too heated, keep it simple and sell some of the silver.

Puts add complexity, add commissions, add taxes, and in this situation add little benefit. At current pricing SLV puts are at 42% volatility, which translates to annual moves of 42% on the underlying. If a person bought at-the-money puts every month for a year, and the price was unchanged, they would lose 42% of their principle--that's expensive as heck protection. Look at it that starkly, put buyers are basically paying 42% of principle for a year's worth of protection. Again, what is the benefit that is worth that cost? Speculators and hedgers might find other uses for puts, but a person with physical has a much easier option--sell some of it.

Big players hedging large positions of physical might sell futures. Puts are a different animal.

jmski52

Generally, the transaction costs are going to be higher for physical metals, so puts would make more sense - IF you simply must play the market.

I just don't see why anyone would want to play this market, and betting on a down move in an up market is going against the odds.

I'd say, adjust your level of commitment only if you don't feel comfortable at the level you're at, but not because you think you can outguess the market.

It's about money management, not leverage or timing - in my opinion, of course.

Added:

After reading Red Tiger's response, his answer is a better answer and is probably more accurate in terms of the costs for holding the put being greater than the transaction costs for selling some physical.