The Protective Put Option Strategy is used when an investor is bullish on a stock but wishes to hedge against potential loss. They are placed on stock currencies and the index gives some protection to the downside. The protective put acts as an insurance policy by providing downside protection in the price of asset decline. The protective put covers a long position of underlying called a married put. It implies that stock and puts are purchased against the existing stock position. They are employed by bullish investors who want to hedge their long positions in the asset.
This strategy is used when an investor is long or purchases shares of stock. The investor who owns stock has a risk of taking a loss on investment if the stock price declines are below purchase price. The investor will buy at the same time and purchase the stock. If the stock raises the long stock position has many benefits and the bought put option is not needed. Strtegy covers a portion of an investor’s long position holding. When the ratio of protective put coverage is equal to the amount of long stock the strategy is called put. The married puts are used when investors want to buy a stock and purchase the put to protect the position. We use a strategy as a form of hedging or risk management. The other upside to a protective put is for limited risk and does not limit the profit potential. Investors who set up a these may feel that they are bullish on the stock but want to limit their loss in case.
view moreSuppose there are 100 shares in ABC Corporation and each share value is $100. You believe that the price of shares will increase day by day. To hedge against the risk of unexpected price, decide to purchase one protective put contract with a strike price of $100 as the premium of the strategy is $5.
The cost of premiums is protective and provides downside protection from an asset price decline. The protective put will allow investors to remain to offer along with stock for gain.
If an investor buys a put and the stock price rise then the cost of premium reduces the profit on the trade. The stock declines in price and a put is purchased the premium is added to lose on the trade.
The stock price of underlying rises as the profit is reduced as it is unlimited by the cost-plus commission.
Risk is limited to an amount equal to stock price minus strike price plus put price plus commissions.
The reason to buy a protective put is to limit the loss on the downside when acquiring the stock. This is the best strategy for a beginner who wants to buy insurance for their long stock position. You understand the importance of all aspects of the trade and how each aspect can affect the profit or loss of the position. A these sometimes called as a married put. These is referred to as a synthetic long call because its profit and loss potential is the same as buying a basic call option. The protective put is used to protect against loss on the value of a stock.
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