Strategy

Protective put

Married Put

Type of Strategy

investing

sentiment

LT bullish      ST neutral-bearish

implied volatility

varied

example

XYZ at $52.  Purchase a 45-dte $50 Put for $2.

boundaries

max loss = $4 ($52-$50+$2)     

max profit = undefined 

Breakeven ~ $54     (underlying + debit paid)

description

Purchasing a put option to hedge an underlying position in times of short-term uncertainty with long-term bullish sentiment.

Equivalent to Married Put (Purchase Stock + Purchase ATM Put)

Set-Up

While holding an underlying position, purchase an ATM or slightly OTM put option.

Soi perspective

As with long calls, purchasing long puts falls into the category of net premium purchasing, and thus is not recommended.  However, when employed in defense of an underlying position, there are situations where a protective put may provide value.

If entering a time of uncertainty in a long equity position, the purchase of a protective put as a hedge to the equity may provide an adequate risk management alternative to selling the underlying outright, especially if the underlying has appreciated value subject to taxation.  Provided long-term sentiment remains positive, the protective put can carry the underlying through the uncertainty without exposure to realized tax or transaction costs.

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