### How to choose a strike price on a protective put?

Posted:

**Thu Jan 16, 2020 11:23 am**I'm trying to learn more about options, and I'm also considering buying some, but I'm having a hard time figuring out what strike price to choose. I would appreciate some advice from those on this forum who have evaluated options previously.

My fiance will receive some restricted stock units of MSFT on February 15th, and the stock is currently trading near $165. I'm considering buying some put options to protect against losses until she receives and sells the stock after 2/15 to diversify (likely on Tuesday 2/18). Note that there is both an earnings and ex-dividend date between now and 2/15.

The first expiration date after 2/18 would be 2/21. Here are some quotes for puts on 2/21:

Strike 140: $0.21/share

Strike 145: $0.35/share

Strike 150: $0.62/share

Strike 155: $1.23/share

Strike 160: $2.36/share

Strike 165: $4.35/share

How would one go about choosing a strike price? Here are some of the things I considered:

1) Buy at the money and lock in existing prices.

2) Find the largest drawdown I was comfortable with and buy a put there. Let's say that was 10%, then I might buy a $150 strike price.

3) There must be some smarter analysis here that involves the expected value of drawdowns of various sizes. I see things like the greeks, implied volatility, etc, but I don't know what to optimize for. However, maybe I should just ignore that because the market has already priced all of that in (as these options seem fairly liquid).

And of course 4) Don't worry about it, don't mess with options at all. I may not end up buying any puts, but I would still appreciate the discussion if someone were considering something like this.

My fiance will receive some restricted stock units of MSFT on February 15th, and the stock is currently trading near $165. I'm considering buying some put options to protect against losses until she receives and sells the stock after 2/15 to diversify (likely on Tuesday 2/18). Note that there is both an earnings and ex-dividend date between now and 2/15.

The first expiration date after 2/18 would be 2/21. Here are some quotes for puts on 2/21:

Strike 140: $0.21/share

Strike 145: $0.35/share

Strike 150: $0.62/share

Strike 155: $1.23/share

Strike 160: $2.36/share

Strike 165: $4.35/share

How would one go about choosing a strike price? Here are some of the things I considered:

1) Buy at the money and lock in existing prices.

2) Find the largest drawdown I was comfortable with and buy a put there. Let's say that was 10%, then I might buy a $150 strike price.

3) There must be some smarter analysis here that involves the expected value of drawdowns of various sizes. I see things like the greeks, implied volatility, etc, but I don't know what to optimize for. However, maybe I should just ignore that because the market has already priced all of that in (as these options seem fairly liquid).

And of course 4) Don't worry about it, don't mess with options at all. I may not end up buying any puts, but I would still appreciate the discussion if someone were considering something like this.