CandleFocus

Protective Put

Candlefocus Editor
Protective puts are an increasingly popular risk-management strategy used by investors across the globe, with protective put strategies employing options contracts to protect against a potential loss in a stock or other asset. A protective put works by providing downside protection for an investor’s long position on a particular asset. The put option buyer pays a premium in return for the protections it affords the buyer, guaranteeing that if the underlying asset’s price declines, the option will provide the buyer with a profit from the difference in the price of the stock or asset and what the option was purchased for.

The owner of the protective put is also long on the underlying asset, and as such, has unlimited potential for gains when the price of the underlying asset increases. A protective put can also be referred to as a “married put” when it covers the entire long position of the underlying asset, meaning that any losses that the option might incur are effectively negated by the increase in value of the held stock.

A protective put can be used in a variety of situations, and is useful to investors who believe that the price of their security may potentially drop. One of the primary risk-management benefits of a protective put strategy is that it offers a more consistent return with less volatility than a longer-term strategy relying simply on the stock market. Protective puts also protect investors from sudden drops in the value of their asset, allowing them to remain invested secure in the knowledge that their downside is limited.

When employed successfully, protective puts can be a powerful way for investors to protect their asset’s downside and secure their gains, when the market is peaking or troughing. By using a protective put option, an investor can ensure that even if the price of the underlying security does not increase, the premium for the put option gives them a safeguard against heavy losses. Protective puts can be used as a way to protect profits made from an asset in the event of an unexpected market downturn and provide an investor peace of mind in an uncertain market.

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