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Protective Put |
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Protective puts are a simple and relatively inexpensive means for investors to position themselves for any possible change in directions in today’s highly volatile market.
The investor employing such a strategy owns shares of underlying stock from a previous purchase and has unrealized profits accrued from an increase in value of those shares. However, the investor might have some apprehension about potential downside market risks in the value of his shares and desire protection for the gains in share value. Basically, purchasing puts while still holding shares of underlying stock is a directional strategy, but a bullish one.
For each 100 shares of stock an investor buys, he also buys one protective put at a strike price or two below the current market price. For example: if the investor buys a stock at $50, he would either buy either the 47.5 put or the 45 put, so in case the stock plummets, he'll be able to sell the stock for close to what he paid for it. Conversely, if the stock jumps, the investor is able to fully participate in the upswing minus the small amount he paid for the protective puts. Basically, the puts act as an insurance policy.
As the stock moves higher, the investor might want to roll the put up by selling the contracts he owns and buying another one at a higher strike price. This way, the investor can lock in profit from the move higher. As any veteran of stock investment can tell you, what goes up rapidly can drop just as fast—if not faster. If a stock jumps from $50 to $122, the 45 puts won't provide much protection on the downside. This is why it is advisable to lock in profits by rolling the puts up to the 115 or 120 strike.
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| Symbol |
Rate |
| GBP:CHF |
1.747703 |
| GBP:JPY |
155.484239 |
| GBP:USD |
1.638403 |
| NZD:USD |
0.627050 |
| EUR:CAD |
1.545998 |
| EUR:CHF |
1.516857 |
| EUR:GBP |
0.867915 |
| EUR:JPY |
134.947096 |
| EUR:USD |
1.421994 |
| AUD:JPY |
76.394373 |
| AUD:USD |
0.805000 |
| USD:CAD |
1.087204 |
| USD:CHF |
1.066711 |
| USD:JPY |
94.899879 |
| USD:SEK |
7.613010 |
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History