How to Implement the Protective Put Strategy Safely

The protective put strategy is very useful for stock traders. The ‘put’
protective-put-strategy acts as a reminder. It provides an owner with the right without the obligation to sell a particular stock at a specific price and by specified time frame. It’s also called ‘married put’.

To get this opportunity, the buyer or the trader has to pay a premium. The seller receives the premium and is obliged to take the delivery of stocks that should the buyer wants to sell the stock. That is at a specified stoke price and by the specified time and date. A protective put strategy offers highest protection against any considerable loss.

The Protective Put, also known as ‘puts and stock’ or ‘bullets’, is the perfect strategy for investors who wish a full hedged coverage for their stocks. While the Covered Call Strategy covers investors only on the premiums he receives, the protective put strategy protects investors from even the breakeven point down to the zero.

This philosophy of protective put strategy is also different from that of covered call strategy in two ways:

The first, while the covered call is all about premium selling strategy, the protective put is a about premium purchasing strategy. Second, the covered call strategy is more effective in a less volatility situation but the protective put is effective in high volatile situations.

When the investors purchase stocks, they can either sell the call that is buy-write or buy the put that is protective put, so that it provides a necessary protection (hedge). The implementation of the protective put strategy to construct protective put position is quite simple. Investor buys the stock and he buys the put on a one to one ratio. That is, one put for every 100 shares.

For example, keeping in mind that one option contract worth 100 shares, if you have 400 shares of HP then you need to buy exactly four puts.

Number of Shares purchased                    Put Contracts to Buy
100                                                             1
400                     4
1600                      16
9000                90
15000                  150
200000               2000

From a premium point of view, we need to keep in mind that with buying an option, we will be paying out money in opposition to collect money. This implies that our position should outperform the money that we required to put out which is just opposite of what we have to do in covered call strategy.

If we need to pay $2.00 for the ‘put’ and we purchased stock against this put, we will need the stock to increase in price at least $2.00 just to meet the break even point. Unlike in the case of covered call strategy, the protective put strategy uses the premiums against it; thereby the stocks need to gain even more to compensate the cost of the put.

So, investors should try to employ a protective put strategy or married put can be very effective in the proper situation.

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How to Implement the Protective Put Strategy Safely

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