Options (as a hedging strategy)

ITM : in the money; strike price is lower than the spot price
ATM : at the money; strike and spot price are equal.
OTM: out the money; strike price is higher than the spot price.

Put options give investors the right to sell an asset at a specified price within a predetermined time frame. The pricing of options is determined by their downside risk, which is the likelihood that the stock or index that they are hedging will lose value if there is a change in market conditions. Downside risk is based on time and volatility.
Call options give investors the right to buy the underlying security; put options give investors the right to sell the underlying security. Ideally, the purchase price of the put option would be exactly equal to the expected downside risk of the underlying security. This would be a perfectly priced hedge. However, if this were the case, there would be little reason not to hedge every investment.
Most Options Have Negative Average Pay-outs because the market is nowhere near efficient, precise, or generous. For most securities, put options have negative average pay-outs. There are three reasons for this:

• Volatility Premium: Implied volatility is generally higher than realized volatility for most securities. The reason for this is open to debate, but the result is that investors regularly overpay for downside protection.
• Index Drift: Equity indexes and associated stock prices tend to move upward over time. When the value of the underlying security gradually increases, the value of the put option gradually declines.
• Time Decay: Like all long option positions, every day that an option moves closer to its expiration date, it loses some of its value. The rate of decay increases as the time left on the option decreases.

Long Term Put Options

Investors are often more concerned with hedging against moderate price declines than severe declines, as these types of price drops are both very unpredictable and relatively common. For these investors, a bear put spread can be a cost-effective hedging strategy. In a bear put spread, the investor buys a put with a higher strike price and sells one with a lower strike price with the same expiration date. This only provides limited protection because the maximum pay-out is the difference between the two strike prices. However, this is often enough protection to handle either a mild or moderate downturn.
Adding extra months to a put option gets cheaper the more times you extend the expiration date. This hedging strategy also creates an opportunity to use what are called calendar spreads. Calendar spreads are created by purchasing a long-term put option and selling a short-term put option at the same strike price. However, this practice does not decrease the investor's downside risk for the moment. If the stock price declines significantly in the coming months, the investor may face some difficult decisions. They must decide if they want to exercise the long-term put option, losing its remaining time value, or if they want to buy back the shorter put option and risk tying up even more money in a losing position.
Another way to get the most value out of a hedge is to purchase a long-term put option, or the put option with the longest expiration date. A six-month put option is not always twice the price of a three-month put option. When purchasing an option, the marginal cost of each additional month is lower than the last.
If an investor has a six-month put option on a security with a determined strike price, it can be sold and replaced with a 12-month put option with the same strike price. This strategy can be done repeatedly and is referred to as rolling a put option forward. By rolling a put option forward, while keeping the strike price below (but close to) the market price, an investor can maintain a hedge for many years.
 With Put Options the rise in the stock or portfolio may offset part or all of the put premium paid. Also, a put buyer does not have to fund a margin account—although a put writer must supply margin—which means that one can initiate a put position even with a limited amount of capital.