Protective Put
You may consider using a protective put strategy to hedge your long position.
Construction of the strategy
A protective put involves two trades:
● Long 100 shares of a stock
● Buy a put
The number of shares held equals the number of shares put options represent.
Brief description
The Protective Put is a typical hedging strategy. In this strategy, investors generally long an underlying asset and buy an at-the-money (ATM) put option simultaneously. This strategy retains the unlimited upside potential of the underlying while capping potential losses for the life of the put option.
If the underlying advances sharply, traders using this strategy will benefit from the long position. The return on the protective put strategy will be slightly lower than only holding the underlying because of the put premium paid.
If the underlying price falls sharply and goes below the put's strike price, traders can exercise the put option and sell the underlying at the strike price. This is where the strategy's name "protective" comes from, i.e., protecting the long position.
Gain & Loss
● Breakeven
Breakeven = Stock Purchase Price +Net Premium
● Max gain
Potentially unlimited
● Max loss
When the strike of the put is less than or equal to the purchase price of the underlying, potential losses may occur：
Max loss= Stock Purchase Price- Put Strike Price +Net Premium
Example
Suppose there is a theoretical stock called TUTU trading at $52 on the Nasdaq. You expect it to rise in the long term but want to limit its downside risk, so you use a protective put:
● Buy 100 shares of TUTU at $52
● Buy a $2 TUTU put with a strike of $52
（The following calculations do not include commissions and other charges.）
This hypothetical example is for illustrative purposes only and is not intended to represent any specific investment.
This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. Read more
