Intermediate to advanced options strategy knowledge

Views 4564 Oct 10, 2024

Protective Put

Usage scenarios

When you hold stocks, if you want to hedge against the risk of falling stock prices, you can choose a protective put option strategy.

How to build

The protected put option strategy consists of two parts of trading:

● Buying stocks

● Buy put

The number of shares bought is equal to the number of shares corresponding to the put

Strategy brief

A protective put option strategy is a typical hedging strategy. Protection refers to buying put options to protect stock positions.

In actual trading, the proper use of this strategy can achieve two purposes:

1. Hedging risks

When investors choose to buy stocks in anticipation of a sharp rise in stock prices, they face the risk that the stock price may fall.

At this point, if you buy a corresponding amount of flat put options at the same time, you can limit the risk of falling stock prices by using a smaller cost (the cost of buying a put option).

It's like holding a stock position and buying an insurance.

When the stock price rises as scheduled, the return on this strategy is slightly lower than the return on buying the stock because it costs more “premiums.”

When the stock price falls more than the exercise price of the put option, the investor can choose to exercise the right and sell the stock at the exercise price of the put option.

2. Increase revenue

When investors are optimistic about the future of stocks for a long time, after holding long positions for a period of time, they judge that the stock price may face short-term pressure, and there may be a certain decline.

At this point, you can choose to buy a put option to obtain short-term benefits, thereby increasing the return of the overall portfolio.

When the stock price falls as scheduled, it is possible to make a profit by buying a put option. If investors sell the put option and close their position after making a profit, part of the profit will fall into the bag.

Next, if the stock price continues to rise until the option is bought, at this point, this operation is an additional profit compared to simply holding the stock.

It is important to note that this type of operation is based on a more accurate stock price judgment and is suitable for experienced investors with strong judgment.

Overall, a protective bearish strategy is a strategy with unlimited profits and limited losses. Profit is limitless because there is no room for stock prices to rise. The loss is limited because the maximum loss for this combination is the term premium.

In actual use, protective put options are a very popular strategy for long-term value investors because they can limit risk at a low cost.

Risks and benefits

Protective Put -1

● Break-even point

Breakeven point = stock cost price+option premium

● Maximum profit

unlimited

● Maximum loss

Maximum loss = stock purchase cost - exercise price+option premium

Examples of calculations

Assuming that in the US stock market, TUTU's current stock price is 52 US dollars. You have been optimistic about TUTU for a long time and want to hold this stock for a long time, but at the same time want to have hedging protection when the stock price falls sharply, so you have created a protective put option:

Buy 100 TUTU shares at a cost of 52 US dollars per share;

I bought 1 put with an exercise price of 52 US dollars at a price of 2 US dollars;

At maturity, your earnings will be as follows:

Protective Put -2

Disclaimer: The above content does not constitute any act of financial product marketing, investment offer, or financial advice. Before making any investment decision, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors where necessary.

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