Mixing Exposure  •  251
Equivalent 
AAPL Strike ($) Deductible ($)  Annual Premium ($)
Total Liability to Home 
Owner ($)
450 2,795 64,500 67,295
405 52,516 32,500 85,016
360 102,236 13,500 115,736
I know that I would not be insuring my house at these rates and under 
those conditions! In light of these prices, the first thing you must consider 
is whether protecting a particular asset from unrealized price declines is 
worth the huge realized losses you must take to buy put premium. Buying 
ATM put protection on AAPL is setting up a 12.9 percent hurdle rate that 
the stock must surpass in one year just for you to start making a profit on 
the position, and 13 percent per year is quite a hurdle rate!
If there is some reason why you believe that you need to pay for insurance, 
a better option—cheaper from a realized loss perspective—would be to sell 
the shares and use part of the proceeds to buy call options as an option-based 
replacement for the stock position. This approach has a few benefits:
1. The risk-reward profile is exactly the same between the two 
structures.
2. Any ATM or ITM call will be more lightly levered than any OTM 
put, meaning a lower realized loss on initiation.
3. For dividend-paying stocks, call owners do not have the right to 
receive dividends, but the amount of the projected dividend is de-
ducted from the premium (as part of the drift calculation shown 
in the section on covered calls). As such, although not being paid 
dividends over time, you are getting what amounts to a one-time 
upfront dividend payment.
4. If you do not like the thought of leverage in your portfolio, you can 
self-margin the position (i.e., keep enough cash in reserve such that 
you are not “borrowing” any money through the call purchase).
I do not hedge individual positions, but I do like the ITM call op-
tion as an alternative for people who feel the need to do so. For hedg-
ing of a general portfolio, rather than hedging of a particular holding in 
a portfolio, options on sector or index exchange-traded funds (ETFs) are 
more reasonably priced. Here are the ask prices for put options on the SPX