A simple strategy to limit losses when you are bullish about a stock but want to protect the value of the stock in case of a downturn.
Description:
The investor pays a premium for the put option, which gives them the right, but not the obligation, to sell the stock at a predetermined strike price (strike A).
If the stock price declines significantly, the investor can exercise the put option and sell the stock at the higher strike price, limiting their potential losses. This will allow the investor to realize a profit equal to the difference between the stock price and the strike price, plus the premium paid for the put option.
The value of the put option will also decrease as time passes and is sensitive to changes in volatility. A protective put strategy can be a good choice for investors who want to protect their long stock positions against potential losses, but it’s important to carefully consider the potential risks and rewards before implementing this strategy.
Breakeven:
Current stock price plus the premium paid for the put.
Sweet Spot:
Stock to go Up & Put to expire worthlessly.
Max Profit:
Profit is theoretically unlimited, as you still own the stock & have not capped the upside.
Max Loss:
Limited Risk to the premium paid for the put option. If the stock price does not decline significantly, the investor will not exercise the put option and will lose the premium paid for the option.
