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 exactly opposite to Covered Call Strategy. Here the investor is neutral or moderately bearish in nature and wants to take advantage of the price fall in the near future. The trader will short one lot of stock future. Now the trader will short ATM Put Option, the option strike price will be his exit price. If the prices rally above the strike price, the ..
PROTECTIVE PUT Vs COVERED PUT - When & How to use ?
PROTECTIVE PUT
COVERED PUT
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 Covered Put works well when the market is moderately Bearish.
Action
Buy 1 ATM Put
Sell Underlying Sell OTM Put Option
Breakeven Point
Purchase Price of Underlying + Premium Paid
Futures Price + Premium Received
PROTECTIVE PUT Vs COVERED PUT - Risk & Reward
PROTECTIVE PUT
COVERED PUT
Maximum Profit Scenario
Price of Underlying - Purchase Price of Underlying - Premium Paid
The profit happens when the price of the underlying moves above strike price of Short Put.
Maximum Loss Scenario
Premium Paid + Purchase Price of Underlying - Put Strike + Commissions Paid
Price of Underlying - Sale Price of Underlying - Premium Received
Risk
Limited
Unlimited
Reward
Unlimited
Limited
PROTECTIVE PUT Vs COVERED PUT - Strategy Pros & Cons
PROTECTIVE PUT
COVERED PUT
Similar Strategies
Long Call, Call Backspread
Bear Put Spread, Bear 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, unlimited risk. • Trader should have enough experience before using this strategy.
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.
• Investors can book profit when underlying stock price drop, move sideways or rises by a small amount. • Able to generate monthly income. • Able to generate profit from fall in prices or mild increase in the prices.
