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    Options Guide: Options Strategies: Protective Put

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    Lamico Dellavvoltoio
    The protective put strategy involves purchasing put options while holding shares of the underlying stock as a way to protect unrealized gains. It allows the investor to limit potential downside losses if the stock price declines, guaranteeing the right to sell the shares at the put's strike price. The maximum potential profit is unlimited since gains from stock price increases are not capped, while the maximum loss is limited to the difference between the strike price and purchase price plus the premium paid. For the strategy to be profitable, the stock needs to remain above the break-even point of the purchase price plus premium.

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    Options Guide: Options Strategies: Protective Put

    Uploaded by

    Lamico Dellavvoltoio
    20 views3 pages
    The protective put strategy involves purchasing put options while holding shares of the underlying stock as a way to protect unrealized gains. It allows the investor to limit potential downside losses if the stock price declines, guaranteeing the right to sell the shares at the put's strike price. The maximum potential profit is unlimited since gains from stock price increases are not capped, while the maximum loss is limited to the difference between the strike price and purchase price plus the premium paid. For the strategy to be profitable, the stock needs to remain above the break-even point of the purchase price plus premium.

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    firstrade.com-Options Guide(4)

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    The protective put strategy involves purchasing put options while holding shares of the underlying stock as a way to protect unrealized gains. It allows the investor to limit potential downside losses if the stock price declines, guaranteeing the right to sell the shares at the put's strike price. The maximum potential profit is unlimited since gains from stock price increases are not capped, while the maximum loss is limited to the difference between the strike price and purchase price plus the premium paid. For the strategy to be profitable, the stock needs to remain above the break-even point of the purchase price plus premium.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    20 views3 pages

    Options Guide: Options Strategies: Protective Put

    Uploaded by

    Lamico Dellavvoltoio
    The protective put strategy involves purchasing put options while holding shares of the underlying stock as a way to protect unrealized gains. It allows the investor to limit potential downside losses if the stock price declines, guaranteeing the right to sell the shares at the put's strike price. The maximum potential profit is unlimited since gains from stock price increases are not capped, while the maximum loss is limited to the difference between the strike price and purchase price plus the premium paid. For the strategy to be profitable, the stock needs to remain above the break-even point of the purchase price plus premium.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
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    Options Guide

    firstrade.com/content/en-us/education/guidesoptions/

    Options Strategies: Protective Put


    An investor who purchases a put option while holding shares of the underlying stock
    from a previous purchase is employing a "protective put."

    Market Opinion?

    Bullish on the Underlying Stock

    When to Use?

    The investor employing the protective put strategy owns shares of underlying stock
    from a previous purchase, and generally has unrealized profits accrued from an increase
    in value of those shares. He might have concerns about unknown, downside market
    risks in the near term and wants some protection for the gains in share value.
    Purchasing puts while holding shares of underlying stock is a directional strategy, but a
    bullish one.

    Benefit

    Like the married put investor, the protective put investor retains all benefits of
    continuing stock ownership (dividends, voting rights, etc.) during the lifetime of the put
    contract, unless he sells his stock. At the same time, the protective put strategy serves to
    limit downside loss in unrealized gains accrued since the underlying stock's purchase.
    No matter how much the underlying stock decreases in value during the lifetime of the
    protective put option, the put guarantees the investor the right to sell his shares at the
    put's strike price until the option expires. If there is a sudden, significant decrease in the
    market price of the underlying stock, a put owner has the luxury of time to react.
    Alternatively, a previously entered stop loss limit order on the purchased shares might
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    be triggered at both a time and a price unacceptable to the investor. The put contract
    has conveyed to him a guaranteed selling price at the strike price, and control over
    when he chooses to sell his stock.

    Risk vs. Reward

    Maximum Profit: Unlimited

    Maximum Loss: Limited


    Strike Price - Stock Purchase Price + Premium Paid

    Upside Profit at Expiration: Gains in Underlying Share Value Since Purchase -


    Premium Paid

    Potential maximum profit for the protective put strategy depends only on the potential
    price increase of the underlying security; in theory it is unlimited. If the put expires in-
    the-money, any gains realized from in an increase in its value will offset any decline in
    the unrealized profits from the underlying shares. On the other hand, if the protective
    put option expires at- or out-of-the-money the investor will lose the entire premium
    paid for the put.

    Break-Even-Point (BEP)?

    BEP: Stock Purchase Price + Premium Paid

    Volatility

    If Volatility Increases: Positive Effect


    If Volatility Decreases: Negative Effect

    Any effect of volatility on the option's total premium is on the time value portion of this
    bullish option strategy.

    Time Decay?

    Passage of Time: Negative Effect

    The time value portion of an option's premium, which the option holder has
    "purchased" when paying for the option, generally decreases, or decays, with the
    passage of time. This decrease accelerates as the option contract approaches expiration.
    A market observer will notice that time decay for puts occurs at a slightly slower rate
    than with calls.

    Alternatives before expiration?

    The investor employing the protective put is free to sell his stock and/or his long put at
    any time before it expires. For instance, if the investor loses concern over a possible
    decline in market value of his hedged underlying shares, the put option may be sold if it
    has market value remaining.

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    Alternatives at expiration?

    If the put option expires with no value, no action need be taken; the investor will retain
    his shares. If the option closes in-the-money, the investor can elect to exercise his right
    to sell the underlying shares at the put's strike price. Alternatively, the investor may sell
    the put option, if it has market value, before the market closes on the option's last
    trading day. The premium received from the long option's sale will offset any financial
    loss from a decline in underlying share value.

    © 2020 The Options Industry Council. All Rights Reserved. Visit us online at
    www.optionseducation.org

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