RT Journal Article
SR Electronic
T1 Protecting against Loss: Protective Put Strategies
versus Stop-Loss Strategies
JF The Journal of Investing
FD Institutional Investor Journals
SP 65
OP 76
DO 10.3905/joi.2017.26.3.065
VO 26
IS 3
A1 Ryan McKeon
A1 Marko Svetina
YR 2017
UL https://pm-research.com/content/26/3/65.abstract
AB The authors compare the effectiveness of two popular strategies for managing risk at the individual stock level: stop-loss orders and long put option positions. They find that the protective put generally produces higher returns than the stop-loss order. This result is consistent across a variety of different market conditions, with the protective put’s higher returns most prominent in high-volatility stocks and winner stocks. The authors consider two possible sources for the difference in returns: the greater precision in exit price provided by the protective put and the opportunity cost of stop-loss activation. They find that the difference in performance can be explained entirely by the greater precision in exit price provided by the put strike price relative to the more uncertain price provided by the stop-loss order.TOPICS: Security analysis and valuation, options