A protective put means buying a put option on a stock you already own, so that if the price falls below the put's strike you can sell at the strike. Your maximum loss is the stock price minus the strike price plus the premium paid, your breakeven is the stock price plus the premium, and your upside stays unlimited. It works like insurance: you pay a premium to cap the downside for the life of the option. This article walks through a MarketXLS Excel template for the strategy. It is educational, not investment advice.
**Protective puts **The Protective Put strategy is used by investors to protect their capital gains from a decline in the stock price. Investors buy put options for a given premium to hedge their positions. In this strategy, investors buy put option contracts to hedge against a potential fall in stock price. This strategy is generally used when investors have made profits from stock price appreciation and want to hold stock further but do not want to risk their earnings from a decline in stock price again. This strategy is similar to the most widely used covered call strategy. The objective is the same in both the strategy; however, the significant difference lies in the execution. In a covered call, you write call option contracts while protective puts you buy put option contracts. From a profit/loss standpoint, a trader gets paid to open a covered call; there is a net cash outflow in case of protective puts.
Trading with MS Excel
Use the protective-put workbook and follow the workflow below.
##Input by userIn this section, you put the stock ticker and the expiry for the option of that underlying. You can select the expiry from section 2. Here, we have taken the example of AAPL (Apple Inc.) with an expiry of 19 Feb 2021.
##ExecutionA protective put adds one option leg to a stock position: buying a put, usually out of the money (strike below the current price). In the template example, the underlying is AAPL with a 19 Feb 2021 expiry, and the investor pays a premium of $145 per contract (100 shares). The maximum loss is the drop from the purchase price to the strike, plus that premium.
##Profit, loss, and breakevenThe historical example describes outcomes at various AAPL stock prices. Had the investor not bought put options, the loss would have been significant on the bearish side and it only increases with the stock price. The protective put limits the loss below the strike, while the profits remain unlimited on the bullish side. The breakeven point is the stock purchase price plus the premium paid per share.
##Key takeaways• A protective put limits losses on the bearish side while keeping profits unlimited on the bullish side.
• Since protective put is pretty straightforward, it is also suitable for beginners.
• Loss is limited to the stock price minus the strike, plus the premium, while profit is unlimited on the bullish side.
• An investor pays a premium upfront to open a trade with this strategy.
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The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein.
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##** References**
Learn more about protective put OptionsTrading.org protective-put guide.
