Even more so than a call option, buying a put option is a great defensive strategy. Because, no matter what current market conditions are, it is always a good idea to be ready for a sudden pullback (I'm sure I don't have to rehash the ups and downs of 2007 to make my point here). But I do want to emphasize that in today's market, preparing for the pullback is more important than ever.

Computer-driven trading and push-button money transfers can cause sudden market to drop almost overnight. And even if the market itself doesn't collapse, individual stocks do every day. That's why it's imperative that traders of all levels learn how to put.

While a call option provides for less of a loss in such instances, put options actually profit from them. That is why professionals often hedge their stock portfolios by buying put options.

Learn to Put Before Your Profits Disappear

Buying a put option is just as easy as buying a call option. And your risk is about the same. Basically you can only lose what they pay for the option, nothing more, nothing less.

Now, the best strategy for buying underpriced put options is to buy puts on stocks that fall further than the market during a decline.

It's always a good idea to try to "time-diversify" your put options by owning puts that expire in different months of the year. That way your puts will pay off… even if the market doesn't pay out.

By "time-diversifying" your put options, you'll not only be insuring your portfolio against any volatile market swings, and you'll also be developing an entire new portfolio profit center.

Limited Risk, Higher Reward

The risk of buying a put option is the same as with buying a call option—it has a limited "shelf" life, and it might expire before the stock makes the move you are hoping for. This is when some investors choose to "short-sell" their stocks. Yes, short-selling pays off when a stock price declines and traders are not feeling the pressure by a time constraint as they are with a put option. But keep in mind that short-selling is much more risky than simply buying a basic put.

With a put option, a trader's risk is limited to what you actually pay to buy the option. This is true even if you are completely wrong about the stock and instead of falling, its price soars into the stratosphere.

With a short-sale, your risk is unlimited. A stock can theoretically rise to infinity and beyond, saddling investors with losses far beyond what they may have bargained for. This is the cause of the infamous "short squeezes" you hear about now and then. Investors who short stocks are so fearful of losing a ton of money that they rush to close their positions immediately if the market starts to go haywire.

The Perfect All-Weather Investment

Investors who instead buy put options are not in this kind of danger. While you will take a loss in such a case, you know what the maximum potential loss is before you take the position. And while a loss of any kind is never a comfortable thing, a small loss is much better than a big one.

You never know when the market might suddenly catch a bad case of the chills. And you certainly want to be in the game and ready to profit if it does. Buying put options is the least risky way to do that.

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