← BeginnerLesson 21 · 6:11
Protective put (strategy)
Summary
You can work out a protective put's worst case to the dollar: the drop to the strike plus the premium, times 100. You can find its break-even and see where it helps, where it costs you, and the small fall where you're worse off with it. You can work out what staying protected costs over a year and why that drag matters.
Key terms
- protective put
- Owning shares and buying a put on those same shares to put a floor under the loss.
- floor
- The worst result a protected position can reach, set by the put's strike.
- drag on returns
- A cost, such as buying protection again and again, that comes off your results in every year, good or bad.
- insurance
Check yourself
Answer each question to see why the right answer is right.
1. You own 100 shares of XYZ at $100 and buy one 30-day put with a strike of $95 for $141. What is your worst case in those 30 days?
2. What is the break-even for those shares with the $95 put?
3. XYZ ends at $98. How does holding the put compare with no put?
4. To keep the floor for a year you buy the $141 put 12 times. What does that cost?
5. XYZ ends at $80 at the end of one 30-day period. How does holding the put compare with no put?
Finished the video and the quiz? .