Tim Olson
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33 lines
1.4 KiB
Markdown
33 lines
1.4 KiB
Markdown
---
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description: "A hedging strategy combining long stock with a long put at strike K <= S0, limiting downside loss while preserving unlimited upside."
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tags: [options, hedging, protective, bullish]
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---
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# Protective Put
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**Section**: 2.4 | **Asset Class**: Options | **Type**: Hedging
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## Overview
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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.
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## Construction
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- Buy 1 share of stock at price S0
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- Buy 1 put option at strike K (K <= S0), paying net debit D
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Net position: long stock + long put
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## Payoff Profile
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f_T = S_T - S0 + (K - S_T)+ - D = K - S0 + (S_T - K)+ - D
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- Breakeven: S* = S0 + D
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- Max profit: P_max = unlimited (stock can rise without bound)
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- Max loss: L_max = S0 - K + D (floor established at strike K)
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## Key Conditions / Signals
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- Bullish on the underlying but seeking downside protection
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- Elevated uncertainty or event risk (earnings, macro) where a sharp drop is possible
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- Useful when the trader wants to retain long stock exposure but limit catastrophic loss
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## Notes
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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.
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