As in general investors who purchase share will have thought to never lose the shares. To help alone Protective put (long stock + long put) comes into existence. The protective put is a tactic that comes under risk-management. Most of the investors will choose this strategy to safeguard the stocks that purchased.
If you check the protective put then there are two types. You want to purchase the put by spending some amount. The hedging strategy is the one that will allow an investor to purchase the put option for the cost of free. It is also called a premium. The put option is the bearish strategy it will enable the investor to have faith that the stock or asset that they purchased will decline in the future.
Example of a protective put:
Take for example, if an investor purchased 100 shares and the investor spends $ 10 per share. Suddenly, the price of the stock will get increased to $20 means then it’s an unimaginable gain. However, it’s not the actual gain all because that you haven’t sold the purchased stock. The investor has no idea to sell the purchased stock why means the chances for the stock to get increase even more.
Also, the investor does not want to lose the $10 that spent on the stocks. In order to balance it the investor will choose to purchase the put option in order to protect the gain portion until the put option gets expire. If the investor is purchasing the put option with a strike price of $15 for 75 cents then it will take you to the worse condition all because that the investor wants to sell all the stock for $15 per share.
At the same moment, if you purchase a put option then it will expire within 3 months of time. That’s why you want to choose to purchase Protective put (long stock + long put). It will safeguard your stock until the expiry gets over. In case the stock falls suddenly to $10 or below then you all set to easily gain $15 for sure.
The investor wants to understand the commission that wants to spend on the stock. Of course, if you choose to sell then you can step out from the commission charge as well. If you decide wisely and then purchase the put option then for sure you can witness that your stock will get security.
Be it any sort of the asset such as stocks, currencies, commodities, and indexes as well the put option will protect it from the risk. It will safeguard asserts from facing any fall. As mentioned before, the protective put is a risk-management strategy. Most of the investors will choose this option in order to easily secure it from all sorts of downs.
If you look at the premium type protective puts it will act as an insurance policy by means of offering downside protection. Even the asset that you have purchased is facing any price declines as well as the protective put. if you choose protective puts then for sure the gain level is high and you know it’s all limitless.
In such cases that an investor’s all set to own shares that are available in the assets. by means of choosing the entire long position of the protective put then it is called the married put.
Understand how protective put is working:
Most of the case, the protective put will be purchased by the investor who wishes is to hold the purchased asset for the long term. At the same time, the protective put will allow you effortlessly secure the asset. if an investor is purchasing any of the stock means that is up to the investor but the only thing they want to sell it before the asset reaches the price that is low than the purchased price.
No matter what purchasing the Protective put (long stock + long put) will helps an investor to hold the asset because it will reduce the risk level as well as before the decline. As in general protective put is provided with a known floor price that will secure the investor from facing so many numbers of losses. No matter even that the asset’s price continues to fall.
Actually, the investor is allowed to have the put option in a contracted manner. You all set to sell the put option for a specific amount or else you can even sell the put option on a specific period as well. It’s all based on the wish of the investor alone. The set price of the contract is called a strike price.
If you check the specific date then it is obviously pointed out the expiration date or expiry. In the contract set, one contract is equal o the 100 shares. As mentioned prior, the put option is not free and it is called the premium. The put option’s price will get differ based on the asset price and the stocks that you have.
How to use protective put?
If you purchase a protective put then you are all set to use it in three common ways. If you choose to use it in this manner then for sure,
- Unrealized profits from previously purchased shares from all sides
- Going for a new stock purchase
- Previously purchased shares that will get a decline in the price means will protect it from the other sorts of the loss.
If you look at the first and foremost point, an investor will purchase the shares in the previous days now its value gets increased than the purchased amount then it’s called an unrealized profit. This choice is good for the investor who thinks that the stock is a good investment. But put option will surely protect the profit that comes. Even if it didn’t protect fully as well it will partially protect the profits for sure.
If you look at the second option then an investor will be bullish on the stock that he purchased before and trying to purchase new stock. On the other hand, if the investor has an idea about the temporary decline. In such a case purchasing a put option will allow protecting your stock from the downside.
Then if you check the last point, in that the investor wants to own a stock that is provided with declined value by means of that the investor faces unrealized losses for sure. It’s all because that the investors already have some ideas on the stocks. Also the investor is also having much confidence in the current market value.
The investor won’t sell the stocks purchased by them. Alongside the investor will safeguard it by means of the put option. All that the investor invests for the stock is only a little bit and at the same time, the investor will choose to protect the stock by means of purchasing the little price protective put.
All the cases that you have seen before the protection level offered by the Protective put (long stock + long put) will get differentiate by means of the strike price as well as the options expiration month as well. It will show you the downside risk that presents in the stock.
Why purchase protective put?
If you choose to purchase protective put then for sure you will be offered complete over the stock. At the same time, if you buy the protective put then you all set to easily understand that the price that you will gain by means of the purchased stock. You are required to pay in order to purchase a put.
You can also sell it for a specific amount and if the put reaches the expiry date. Alongside if you buy the stock as well as the protective put means then it will be called as married put as mentioned before. If you choose this option then you all set to easily get profit and you know if you choose this option then for sure then you will acquire double gain.
Appropriate market forecast:
Generally, the protective put strategy is always wanting two parts of the forecast. The first and foremost should be a bullish one. Only by means of the bullish one you want to purchase or else hold the stock. The second most wanted to be the reason to reduce the risk that present in the stock purchase. May or may not that there are any sorts of the pending earnings report you will obtain it.
The report is consists of the stock price that will be offered without any skip from any of the sides. On this occasion purchasing put will helps the investor to safeguard the stock in many ways. For example, if an investor is purchasing a stock means then for sure the put will give massive benefit if the result comes positive.
On the other hand, if the report offers a negative report then the purchased put will allow you to enjoy all because the put will reduce the risk level for sure. Sometimes the stock graph may start to go upward. The stock level is unpredictable in case if you purchased a put in order to safeguard the loss and then limit the risk. The stock trend will also change.
If you are going to purchase a put with an aim to limit risks then for sure it will help. The put will safeguard the stock until its expiry date. You all set to sell the put but your stock position will fall into risk. That is why it is recommended to sell the put and then buy another put. By means of this, you will be allowed to extend the protection with no doubt.
Impact of stock price change:
If you decided to purchase a put then just calculate the protective put position that is the stock price as well as put price. In such a case, if the Protective put (long stock + long put) position rises when the price of the stock gets increases and then it will fall if the stock price falls. on the other hand, the value will get differ by means of the two parts such as the long stock, and the long put these two things will acquire change means then the protective put will get change in the “positive delta”.
Alternatively, the long put value will get change in some other direction as well while the stock prices get change. At the same moment, the long put decreases then you will face loss for sure. On the other hand, if the stock price gets increases, and then the long put price will also increase in the end you will gain profit without any doubt.
Understand that the put price will not get changed in the dollar-for-dollar with changes in the price actually the put price will get change based on the stock. Most importantly the price changes can be happened by means of the “delta”. In order to calculate the put price, you want to have an eye on the delta for sure.
For example, if the long put delta value at the money if of -50% undoubtedly the $1 stock price will get affect a lot. Now the long put wants to make up to 50 cents from at the money side for all the shares. On the other hand, if the $1 stock price will get increase then it will affect at-the-money of the long put then you will surely lose up to 50 cents for all the shares.
When it comes to long put there are two things that will be available. One is the in the money long puts that will change between -50% and then -100%. If you look at the out of the money long puts then the delta value will tend between zero and -50%.
Thus in the protective put position if the delta tends in negative value then the long put decreases the sensitivity of the total position to changes in the stock price. If you calculate the overall delta will always give a positive result.