An option strategy wherein, the investor who owns a security, purchases put options of the same underlying security to protect against adverse price movement.
This strategy is also known as synthetic long call or married put.
When to use this strategy?
This strategy is used when an investor is bullish on the underlying security but wants to be hedged against any downward movement in its price.
How to build this strategy?
This strategy has two legs:
Leg 1 – Buy the underlying security, quantity being equivalent to the lot size of the options contract.
Leg 2 – Buy 1 ATM Put
Credit Spread/Debit Spread
Protective put strategy is always a debit transaction as the buyer of the option has to pay the premium value.
The profit potential of this strategy is unlimited.
When is this strategy profitable?
The investor stands to gain when the underlying security price is greater than the purchase price of the underlying plus the premium paid for the put option.
The risk is limited in this strategy.
When is this strategy unprofitable?
The maximum loss faced by an investor occurs when the underlying price is below the strike price of put option.