What is a Protective Put? Options Trading Strategies
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These classes are all based
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What is a Protective Put?
A protective put is a trading or investment strategy that investors can use to guard against losses in a stock or other asset. The put option acts like an insurance policy—it costs money, which reduces the investor's potential gains from owning the security but also reduces the risk of losing money if the security declines in value. A protective put is also known as a married put.
Breaking Down the Protective Put
Protective puts involve being long a stock and purchasing put options for that stock with a strike price that is near the underlying stock's current price or slightly out of the money. A protective put is typically used when an investor is still bullish on a stock but wishes to hedge against potential losses and uncertainty.
Profit and Loss
The maximum profit of a protective put is theoretically unlimited as the strategy involves being long on the underlying stock. If the stock keeps rising, the long stock position benefits and the bought put option isn't needed.
The maximum loss is limited to the purchase price of the underlying stock less the strike price of the put option and the premium paid. The strike price of the put option acts as a barrier where losses in the underlying stock stop. The ideal situation in a protective put is for the stock price to increase, as the investor would benefit from the long stock position. In this case, the put option will expire worthless, but the stock will have increased in value.
Take a look at my other two videos in this series, one on covered calls and one on put call parity where we learn the relationship between a protective put and being long a call option.
Covered Call Video: • What is a Covered Call? - Options Tra...
Put Call Parity Video: • What is Put Call Parity? How does it ...
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