Tim Olson
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1.4 KiB
1.4 KiB
description, tags
| description | tags | ||||
|---|---|---|---|---|---|
| A hedging strategy combining long stock with a long put at strike K <= S0, limiting downside loss while preserving unlimited upside. |
|
Protective Put
Section: 2.4 | Asset Class: Options | Type: Hedging
Overview
The protective put (a.k.a. "married put" or "synthetic call") amounts to buying stock and buying an ATM or OTM put option with strike K <= S0. The trader's outlook is bullish. The put option hedges the risk of the stock price falling, acting as insurance on the long stock position.
Construction
- Buy 1 share of stock at price S0
- Buy 1 put option at strike K (K <= S0), paying net debit D
Net position: long stock + long put
Payoff Profile
f_T = S_T - S0 + (K - S_T)+ - D = K - S0 + (S_T - K)+ - D
- Breakeven: S* = S0 + D
- Max profit: P_max = unlimited (stock can rise without bound)
- Max loss: L_max = S0 - K + D (floor established at strike K)
Key Conditions / Signals
- Bullish on the underlying but seeking downside protection
- Elevated uncertainty or event risk (earnings, macro) where a sharp drop is possible
- Useful when the trader wants to retain long stock exposure but limit catastrophic loss
Notes
The protective put is the put-call parity complement to the covered call. The debit paid for the put reduces the effective profit from stock appreciation. The maximum loss is capped at S0 - K + D regardless of how far the stock falls.