Example analysis of options strategy - Protective put strategy

Investment Strategy: Protective Put Strategy (Detailed Graphic Version)

The Protective Put strategy is a hedging strategy where investors hold the underlying stock while purchasing corresponding put options (Put) to limit potential significant losses in the future. The core logic of this strategy is to cap the downside risk of a long position. By paying a small premium, it protects the losses of the held stock when prices fall while still retaining the potential for stock price appreciation.

🧺Example Position:

• Stock - 100 shares; Cost Basis: $235
• Option - AAPL 241101 220.00 PUT; Premium $5

📈Profit and Loss Analysis 0️⃣ Initial Price $235 This price point is where we made our purchase. At this point, we hold a stock position with a cost basis of $235 and spent $500 to buy the AAPL 241101 220.00 PUT option. The profit and loss of the portfolio at this stage is simply the premium spent: -$500

1️⃣Break-even Point $240 At this price, the stock leg generates a profit of ($240 - $235) * 100 = $500, offsetting the $500 premium spent at the initial price. The portfolio's profit and loss now stand at 0. In other words, the portfolio only becomes profitable when the stock price rises above $240. Profit amount = (Current Price - $235) * 100 - $500. The profit potential is unlimited, increasing linearly with the stock price.

2️⃣Maximum Stop-loss Point $220 When the stock price is at or below $220, the put option we purchased grants us the right to sell the stock at $220. By exercising this right, we can prevent further losses as the stock price declines. Here’s the detailed calculation: Maximum Loss Amount = Option P&L + Stock P&L = (($220 - Current Price) * 100 - $500) + ((Current Price - $235) * 100) = -$2000

This shows that the loss of this strategy is capped, while the profit potential increases with the stock price.

🪙Applicable Scenarios: Protective Put Strategy

• 🟩 Holding stocks but concerned about market downturns
• 🟩 Protecting existing gains
• 🟩 Risk management for long-term stock holdings

🔴 Risk Points

• 🔻Increased cost - Premium paid for the option
• 🔻Time value decay - Due to the nature of options
• 🔻Liquidity risk - Options may have low liquidity