Protective Put Strategy is a hedging strategy where trader guards himself from the downside risk. This strategy is adopted when a trader is long on the underlying asset but skeptical of the downside. He will buy one ATM Put Option to hedge his position. Now, if the underlying asset moves either up or down, the trader is in a safe position.
This strategy is applied when trader goes long on the underlying asset i.e. he buys the stock in cash market. He has a bullish view and expects the market to rise in the near future, but simultaneously has the fear of downward movement of the markets. In order to cover his position from vulnerabilities he buys one ATM Put Option of the same underlying asset. Here, a trader wi ..
PROTECTIVE PUT Vs MARRIED PUT - When & How to use ?
PROTECTIVE PUT
MARRIED PUT
Market View
Bullish
Bullish
When to use?
This strategy is adopted when a trader is long on the underlying asset but skeptical of the downside.
This Strategy work when the investor goes long in any stock. He expects the rise in market in future.
Action
Buy 1 ATM Put
Buy 250 XYZ Shares, Buy 1 ATM Put Option
Breakeven Point
Purchase Price of Underlying + Premium Paid
Purchase Price of Underlying + Premium Paid
PROTECTIVE PUT Vs MARRIED PUT - Risk & Reward
PROTECTIVE PUT
MARRIED PUT
Maximum Profit Scenario
Price of Underlying - Purchase Price of Underlying - Premium Paid
Profit = Price of Underlying - Purchase Price of Underlying - Premium Paid
Maximum Loss Scenario
Premium Paid + Purchase Price of Underlying - Put Strike + Commissions Paid
Max Loss = Premium Paid + Commissions Paid
Risk
Limited
Limited
Reward
Unlimited
Unlimited
PROTECTIVE PUT Vs MARRIED PUT - Strategy Pros & Cons
PROTECTIVE PUT
MARRIED PUT
Similar Strategies
Long Call, Call Backspread
Long Call
Disadvantage
• Value of protective put position decreases as time passes • Holding period of the protective put can be affected by the timing as a result tax rate on the profit or loss from the stock can be affected.
Cost of the put options eats into profit margin.
Advantages
• Unlimited potential profit due to indefinitely rise in the underlying stock price . • This strategy allows you to hold on to your stocks while insuring against losses. • Hedging strategy, trader can guard himself from the downside risk.
