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Protective Puts

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Purpose of Protective Puts

1. To protect a portfolio of stocks from decline in account value


Expectations of Protective Puts

Bullish


Type of Spread

Debit Spread


How To Use Protective Puts

Buy to open 1 contract of at the money put options for every 100 shares that you own.

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Profit Potential of Protective Puts :
Protective Puts is an option trading hedging strategy which, combined with the underlying stock, grants unlimited maximum profit as long as the underlying stock continues to rise.

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Profit Calculation of Protective Puts :

Profit = (stock price - put strike price - cost of put) x number of shares


Risk / Reward of Protective Puts:

Upside Maximum Profit: Unlimited

Maximum Loss: Limited


Break Even Point of Protective Puts:

Breakeven = Initial stock price + cost of put options bought.


Advantages Of Protective Puts:

  • Allows you to hold on to your stocks while insuring against any losses.


    Disadvantages Of Protective Puts:

  • Cost of the put options eats into profit margin.


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