A protective put , also known as a synthetic long call or married put, is an options strategy that consists of buying or owning the stock, and then buying one put at strike price A. The investor who enters this strategy wants the stock to trade higher, best option trading strategy but also wants protection in case the stock price falls below strike price A, giving the investor the right to sell the stock.
This strategy is usually applied when the investor is nervous about the market and wants downside protection while allowing themselves to make profits on the upside. double top pattern The protective put acts as a price floor, which limits the amount an investor can lose if a stock continues to trade down. Once the stock moves under the strike price of the protective put, the investor protected from enduring anymore losses.
How to Use the Protective Put
If an investor is already long stock, that investor is risking taking losses if the stock trades down. However, by purchasing a protective put option, an investor is guaranteeing his/her ability to sell the stock at a specific price if the stock continues on a path lower, thus capping their losses.Because the investor has a contract in place to sell a stock, if they so choose, at a specified price, they are creating a price floor that protects their asset. iron condor options The protective put acts like insurance on the asset, and just like all types of insurance, there is a premium paid for this protection. The premium is based on where the investor wants to add his/her price floor, as well as volatility, which represents the likelihood of the price of the stock falling even further. There is also a time limit on how long the insurance last, the more time the investor wants on his insurance, the more the protective put purchase price will be.
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