Example analysis of options strategy - Protective put strategy

Investment Strategy: Protective Put Strategy (Detailed Graphic Version)

The Protective Put strategy is a risk 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 Price: $235
• Option - AAPL 241101 220.00 PUT; Premium $5

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

1️⃣Break-even Point $240 At this point, the stock leg can bring us a profit of ($240 - $235) * 100 = $500, which offsets the $500 spent at the initial point. The portfolio's profit and loss is now 0. In other words, the portfolio will only start to profit when the stock price rises above $240. Profit amount = (Current Price - $235) * 100 - $500. And the profit has no upper limit—the higher the stock price, the greater the linear profit growth.

2️⃣Maximum Stop-loss Point $220 When the stock price is at $220 or below, the put option we purchased gives us the right to sell the stock at $220. Therefore, by exercising this right, we can prevent the portfolio's losses from increasing as the stock price falls. Let’s calculate in detail: Maximum loss amount = Option P&L + Stock P&L = (($220 - Current Price) * 100 - $500) + ((Current Price - $235) * 100) = -$2000

From this, we can see that the loss of this position strategy is capped, but the profit can increase as the stock price rises.

🪙Applicable Scenarios: Protective Put Strategy

• 🟩 Holding stocks but worried about a market downturn
• 🟩 Protecting existing gains
• 🟩 Risk management for long-term stock holdings

🔴 Risk Points

• 🔻Increased cost - The premium paid for the option
• 🔻Time value decay - Due to the nature of options
• 🔻Liquidity risk - Option liquidity may be very low