There are many different ways to protect profits and hedge risk in a winning stock.

You can use a stop loss order, write call options, buy put options, and more.

Today, we’re going to talk about buying puts, and compare that to using stops.

Buying puts is probably the closest alternative to using a stop loss. But it does have additional benefits and drawbacks.

First, it’s important to remember that when you buy a put option, you stand to profit as the market goes down.

So in general, if someone buys a put, he or she has a bearish outlook.

But again, puts can also be used to protect profits and to hedge risk.

So how does it compare to stop loss orders?

With a stop loss order, you’re essentially putting in an order to sell a stock if it goes down to a certain price. If your stock is profitable, and you want to try and lock in a certain portion of your gains in case the market goes down, a stop loss order is a common way to do this.

Let’s say you bought $100 shares of a stock at $100 for an investment of $10,000. And it’s now at $120. That’s a $20 move, or a 20% gain.

You want to stay in, just in case it goes even higher, but you’re worried about the downside as it gets ready to report earnings, for example. So you put in a stop loss order at $110.

If it goes down to $110, you’re now out and you’ve locked in a $10 move or a 10% gain, which is $1,000.

The downside is that if it gaps down big, you could lose even more than you intended as that stop loss becomes a market order. In this case, you’ll get filled wherever the market allows, even below that $110 level.

Buying a put can offer you protection as well. (And it can give you even better protection in the above gap down scenario.)

Using the same example of buying a stock at $100 that’s now at $120, you can instead buy a put for protection.

Let’s say you bought a $120 put with a little less than two months of time on it for $600. (Let’s say this gave you enough time to go thru earnings.)