What is the max loss of a Protective Put?

The max loss is Cost of the Put.

When do I breakeven when utilizing a Protective Put strategy?

The breakeven is defined as Varies.

What is the typical application of a Protective Put?

The typical applicatio is: 1. Protect long shares from a fast, volatile price decrease.

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Beginner

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Option Strategies Details

Setup

Buy 100 Shares + Buy 1 ATM or OTM Put

Typical Application

1. Protect long shares from a fast, volatile price decrease

Volatility forecast

Price forecast

Down

Breakeven

Varies

PnL Equivalent

Long Call

Max contract loss

Cost of the Put

Max position loss

Distance between the cost basis of shares and the strike price minus the cost of the Put. (You own 100 shares of stock XYZ with cost basis $100 per share and you buy a $90P for $5. Stock XYZ goes to $0. Your loss is $10,000 (cost of the shares) - $9,000 (the value of the $90P when the stock goes to $0) - $500 (the cost of the $90P) = -$1,500.)

Protective Put

Level: Beginner

1 Leg

Debit

Beginner

Other names

Married Put

You buy (or already own) 100 shares and buy 1 ATM or OTM Put

Description

A trader who owns 100 shares of stock may buy a Put. The trader pays a debit, called a premium, to buy the Put and has the right (but not the obligation) to sell 100 shares at the strike price. The trader is "protecting" those 100 shares from a large, volatile price decrease with the Put.

Suppose you bought 100 shares of XYZ stock at $70 per share and, over the course of 2 years, the price of XYZ increased to $105. Great investment! However, you forecast a potentially-large, fast price decrease and increase in volatility, so you buy a $100 strike Put for $5.

You now have the right to buy 100 shares of XYZ at $47 per share, guaranteeing you a minimum profit of $25 per share on the whole position: $100 (strike price) - $70 (cost basis) - $5 (the premium paid for the Put) = $25 x 100 shares = $2500.