Selecting the Proper Risk Reduction Tool

Risk management is at the center of any successful investor's strategy. By using the proper strategy, you can enhance your returns whereas lowering the risk of failure. Make sure to use the suitable technique for your scenario.

Now to address the question: what's the proper risk management tool for your situation?

Situation	Trailing Stop Loss	Protective Put
Just bought stock and market is trending up.	The trailing stop will protect you from a move down below the stop price. If the stock rises, the trailing stop will follow based on the percentage or point you entered for the trailing stop order.	The protective put will insure you against a move down below the strike price should the price fall instead of rise. If the stock price continues to climb, the value of the put will fall. If you do not sell the put, you will lose the whole premium you paid to buy the put.
Stock has risen in value and you still like its prospects.	The trailing stop will protect you from a move down below the stop price. If the stock continues to rise, the trailing stop will follow based on the percentage or point you entered for the trailing stop order.	The protective put will insure you against a move down below the strike price should the price fall instead of rise. If the stock price continues to climb, the value of the put will fall. If you do not sell the put, you will lose the whole premium you paid to buy the put.
Stock has fallen in value however you continue to like its prospects.	You will keep the shares as long as the stop isn't hit on any pull back.	If the underlying stock continues to fall, you can buy the put option to protect against short-term losses if you think the company's long-term prospects are sound.
Stock has risen in value however you are concerned the market would possibly flip and fall.	The trailing stop will enable your profits to run if the stock price continues to rise, and will cut your losses if the market turns against you.	If you think the market's turn downward will only be short term, buying a put should be considered. This will let you to hold on to your stock and insulate you against a potential downturn.
You wish to carry the stock for the future and are willing to handle the drops in the price.	You need to either widen the trailing stop, reducing your gain, or accept that you will sell the stock on a pull back. You can always buy it back should the price fall further.	Owning the put will permit you to carry onto your gain based on the strike price. You can hold onto the stock for the long term though there may be tax consequences from using a put. Some investors use the profit from the put strategy to buy additional shares of the company they like.
You wish to hold for more than one year to take advantage of long-term capital gains.	Your stop loss doesn't change the holding period, though if the stop is hit before one year you will incur short-term gains on the sale of your stock.	Buying a protective put can alter your holding period for tax purposes. Check with your tax advisor to be sure.