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.
When a trader is moderately bearish on the market he can implement this strategy. Bear-Put-Spread involves buying of ITM Put Option and selling of an OTM Put Option. If prices fall, the ITM Put option starts making profits and the OTM Put option also adds to profit at a certain extent if the expiry price stays above the OTM strike. However, if it falls below the OTM ..
PROTECTIVE PUT Vs BEAR PUT SPREAD - When & How to use ?
PROTECTIVE PUT
BEAR PUT SPREAD
Market View
Bullish
Bearish
When to use?
This strategy is adopted when a trader is long on the underlying asset but skeptical of the downside.
The bear call spread options strategy is used when you are bearish in market view. The strategy minimizes your risk in the event of prime movements going against your expectations.
Action
Buy 1 ATM Put
Buy ITM Put Option, Sell OTM Put Option
Breakeven Point
Purchase Price of Underlying + Premium Paid
Strike Price of Long Put - Net Premium
PROTECTIVE PUT Vs BEAR PUT SPREAD - Risk & Reward
PROTECTIVE PUT
BEAR PUT SPREAD
Maximum Profit Scenario
Price of Underlying - Purchase Price of Underlying - Premium Paid
Max Profit = Strike Price of Long Put - Strike Price of Short Put - Net Premium Paid.
Maximum Loss Scenario
Premium Paid + Purchase Price of Underlying - Put Strike + Commissions Paid
Max Loss = Net Premium Paid.
Risk
Limited
Limited
Reward
Unlimited
Limited
PROTECTIVE PUT Vs BEAR PUT SPREAD - Strategy Pros & Cons
PROTECTIVE PUT
BEAR PUT SPREAD
Similar Strategies
Long Call, Call Backspread
Bear Call Spread, Bull Call Spread
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.
• Limited profit. • Early assignment risk.
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.
• If the strike price, expiration date or underlying stocks are rightly chosen then risk of losses would be limited to the net premium paid. • This strategy works well in declining markets. • Limited risk.
