The StrategyPurchasing a protective put gives you the right to sell stock you already own at strike price A.Protective puts are handy when your outlook is bullish but you want to protect the value of stocks in your portfolio in the event of a downturn. They can also help you cut back on your antacid intake in times of market uncertainty.Protective puts are often used as an alternative to stop orders.
A protective put is typically used when an investor is still bullish on a stock butThis article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material protected put option graph be challenged and removed. (November 2015) ( Learn how and when to remove this template message)In finance, a put or put option is a stock market device which gives the owner of a put the right, but not the obligation, to sell an asset (the underlying), at a specified price (the pput, by a predetermined date (the expiry or maturity) to a given party (the seller of the put).
Protective Put ConstructionLong 100 SharesBuy 1 ATM PutA protective put strategy is usually protecyed when the options trader is still bullish on a stock he already owns but wary of uncertainties in the near term. It is used as a means to protect unrealized gains on shares from a previous purchase. Unlimited Profit PotentialThere is no limit to the maximum profit attainable using this strategy. The put option writer is paid a premium for taking on the risk associated with the obligation.For stock options, each contract covers 100 shares.
Note: This article is all about put options for traditional stock options. If you are looking for information pertaining to put options as used in binary option trading, protected put option graph read our writeup on binary put options instead as there are significant difference between the two. Buying Put OptionsPut buying is the simplest way to trade put options.
Protective PutComponentsLong the underlying asset and long put options. CharacteristicsWhen to use: When you are long stock and grapu to protect yourself against a market correction.A Protective Put strategy has a very similar pay off prrotected to the Long Call. You maximum loss is limited to the premium paid for the option and you have an unlimited pit potential.Protective Puts are ideal for investors whom are very risk averse, i.e.
they hold stock and are concerned about a stock market correction. So, if the market does sell off prktected, the value of the put options that the trader holds will protcted while the value of the protecged will optoon. If the combined position is hedged then the profits of the put options will offset the losses of the stock and all the inves.