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hey everyone Chris here from Project
option and in this options trading
strategies video we're going to talk
about the protective put now a
protective put is when you combine a
long put option against at least a
hundred shares of stock in an attempt to
completely reduce or eliminate the risk
of a long stock position below a certain
price so let's get into it
alright so the protective put is also
sometimes called a married put but this
is a strategy that consists of buying a
put option against a hundred shares of
long stock now the strategy is used to
cap the downside risk of a long stock
position through the purchase of a put
now the way it works is that when you
buy a put you have the ability to sell
100 shares of stock at the puts strike
price so if you own a hundred shares of
stock and you buy a put against those
shares you effectively lock in a maximum
loss equal to the strike price of the
put because the worst case scenario if
the stock price goes to zero you'll be
able to sell your shares at the strike
price of the put you purchased however
you'll have to pay a premium for that
risk reduction so let's get into the
strategy characteristics of the
protective put so the maximum profit
potential is unlimited because you own
100 shares of stock and there's no limit
to how high the stock can go now the
maximum loss potential is the difference
between the stock purchase price and the
put strike price so remember when you
buy the put you can sell your shares at
the put strike price in the worst case
scenario so the maximum loss on your
shares is the difference between the
price you pay for the shares the put
strike price and then you have to add
the debit you pay for the put because
you're paying a premium for the put
option and that is included in your
maximum loss as well and then you
multiply both of those things by a
hundred to get your maximum loss
potential now the expiration breakeven
price is the stock purchase price plus
the debit paid for the put so one of the
bad things about the protective put
strategy is that since you're paying a
for that downside protection you're
actually increasing the break-even price
of your long stock position so now you
actually need the stock price to
increase just to break even
whereas if you just buy a share of stock
you just needed to increase from its
current level and you'll be profitable
right off the bat so when you buy a
protective put you're actually
increasing your breakeven price which
means you need the stock price to
increase just to break even on the
strategy now the estimated probability
of profit of a protected put is less
than 50% and that's for the reason we
just discussed since the cost of the put
increases the break-even price of your
long shares you need the shares to
increase in price just to break even and
therefore you have a less than 50%
chance of making money on the strategy
now after expiration if your long put is
in the money the long put will
automatically be exercised annual
effectively sell your shares at the
strike price of the put now if the long
put is out of the money then the put
will expire worthless you'll lose the
premium you paid for the put but you'll
keep your long shares now in regards to
assignment risk the protective put
strategies does not include any short
option positions so there is no
assignment risk so now that you know the
characteristics of the protective put
strategy let's go ahead and look at an
example so here we see we have an option
chain and we have call prices and put
prices so we're going to construct a
protective put from these options so in
this case let's assume the stock price
is trading right around $150 and we want
to buy stock but we don't want all the
downside risk so we're gonna buy a
hundred shares of stock for a hundred
and fifty dollars per share and then
we're gonna purchase the 145 put against
those shares and we're gonna pay a $5
premium for that 145 put so we purchase
100 shares of stock for $150 we buy the
145 put we pay a $5 premium for the put
which brings our breakeven price to one
hundred and fifty dollars plus the $5
premium that we paid for the put which
brings our breakeven price to one
hundred and fifty five dollars so at
expiration the stock price needs to be
able have 100
fifty-five dollars for us to break even
or make any money so let's take a look
at the expiration risk profile graph for
this protective put position all right
so let's go ahead and start with the red
line here which is the stock purchase
price so we're looking at the long put
strike price in relation to the stock
purchase price in relation to the
breakeven price and along all of these
different stock prices at expiration we
can see the profit or loss of this
particular protective put position so
right off the bat we notice that we
bought shares of stock for $150 per
share and if you notice at expiration if
the stock price is at $150 per share
we're actually going to be in the hole
by $500 we're gonna have a $500 loss
even though the stock price did not
change now that's because we paid a $5
premium for the 145-foot and if the
stock price remains at 150 the 145-foot
will expire worthless and we'll lose the
$5 premium we paid for the put now of
course in real dollar terms a $5 premium
on an option is $500 so if the stock
price remains at 150 we will lose $500
now however if the stock price Falls to
145 our maximum loss is $1,000 because
we'll have a $5 loss per share and we'll
have a $5 loss on the 145 put that we
purchased so the net loss in that case
is $1,000 now if the stock price goes to
120 our loss is still $1,000 that's
because we're gonna have a $30 loss per
share since we purchased them for 150
and now they're worth 120 so if a $30
loss per share but that 145 put is going
to be worth $25 and since we paid $5 for
that put we have a $20 profit on the 145
put so if we take the $30 loss on the
shares - the $20 profit on the put we
get to a net loss of $10 per share or
$1,000 overall
a hundred share position now if the
stock price goes to 170 dollars I'll
have a profit of $1,500 and that's
because we'll have a twenty dollar
profit on our long shares since we
purchased them for 150 but we'll have a
$5 loss on the 145 put that we purchased
because if the stock price goes to 170
the 145 put we purchased will expire
worthless so if the stock price is at
170 we'll have a $20 profit on the
shares - the $5 loss on the put which
brings our net profit per share to $15
if we multiply that by a hundred we get
to $1,500 so now that you know the
characteristics of the protective put
and you've seen what the expiration risk
profile graph looks like let's go ahead
and take a look at some protective put
trade examples to show you how the
strategy might perform over time as the
stock price increases decreases or
remains flat so the first example we're
going to look at is a protective put
position that ends up profitable so
here's the setup
the initial stock purchase price is
seventy seven dollars and twenty one
cents and we're going to look at buying
the seventy seven and a half put that
expires in 74 days for that put we're
gonna pay a four dollar and ninety five
cent which brings our breakeven price to
seventy seven twenty one plus 4 95 which
is 80 - 16 so the share purchase price
plus the cost of the put comes out to
eighty to 16 so that's where we need to
stock to increase - to break-even the
maximum profit potential is unlimited
and the maximum loss potential is the
share purchase price of seventy seven
twenty one less the put strike price of
seventy seven and a half plus the
premium pay for the put of four
ninety-five times 100 which brings us a
maximum loss of four hundred and sixty
six dollars so let's go ahead and take a
look at how this position performed over
time alright so in the top of this graph
we're looking at the changes in the
stock price which is the dark line and
we're looking at the long put strike
price and the break-even price of this
protective put position now in the
bottom part of the graph we're showing
you the profit and loss of the married
put or the protective put components so
that you can understand where the where
the positions performance comes from so
as we can see here the stock price
starts right around seventy seven and a
half and through expiration it actually
rallies to a point that is above our
breakeven price of 80 to 16 so right off
the bat we know that the strategy will
be profitably because the stock price is
above our breakeven price now let's go
ahead and look at the profit and loss of
the components so we can see that the
blue line represents the profit and loss
of just the
long stock position of a hundred shares
the yellow line is the profit and loss
of the long put that we purchased with a
strike price of seventy seven and a half
and the Green Line is the combination of
those two things so the Green Line is
the protective put which combines the
long stock and the long put so in this
example we can see that the long stock
position actually performed the best now
that's going to be the case in every
protective put scenario where the stock
price increases because since you paid a
premium for that put as protection you
are going to create a drag on the profit
and loss of your long stock so if you
buy a protection against your shares and
the shares increase you're going to make
less money than if you did not bribe
protection at all
that's just our classic risk reward
scenario so in this case the long stock
position ended up with profits greater
than six hundred dollars but since we
paid a premium for that put option the
married put position only had a profit
of around two hundred dollars so here we
can see that the married put position
did not do as well as the long stock
position because the stock price did not
collapse so this just shows that when
you put on a protective put you are
giving up some upside on the stock
because you're paying a premium for the
put that you purchase for protection so
let's go ahead and take a look at
another example
so in this next example we're going to
look at where a protective put really
shines which is when the stock price is
just collapsing so here is the setup the
initial stock purchase price is two
hundred and fifty four dollars and fifty
three cents and we're going to look at
buying the two forty five put that
expires in thirty seven days now for
that put we're gonna pay a premium of
fourteen dollars and fifteen cents which
brings our breakeven price on the
strategy two and then share the share
purchase price of two fifty four or
fifty three plus the put cost of
fourteen fifteen which brings our
breakeven price to to sixty eight sixty
eight so the stock price has to rise to
two hundred sixty eight dollars and
sixty eight cents if we want to break
even on this strategy now the maximum
profit potential is unlimited and the
maximum loss potential is the difference
between the share purchase price and the
put strike price so to 5453 minus two
forty five and we're going to add the
put premium of fourteen fifteen to that
multiply it by a hundred and we get our
maximum loss of two thousand three
hundred and sixty eight dollars so let's
go ahead and take a look at how this
protective put position performed
through time all right so again in the
top part of this graph we're looking at
the changes in the stock price relative
to the long put strike price that we
purchased and to break-even price of
this protective put position now again
on the bottom part of the graph we're
looking at the profit and loss of the
protective put components so the blue
line is the long stock profits and
losses the yellow line is the profits
and losses of the long put and the green
line is the combination of those two
which make up our protective put
position so on the top part of the graph
here we can see that the stock price
kind of remains flat for a little bit
and then it just completely collapses
down to around $200 so drops nearly
twenty percent so as we can see here if
we look at the profit and loss of the
protective put components the long stock
position lost a considerable amount of
money but to offset that we can see that
the long put actually started increasing
in value and was creating profits for us
so
this really just shows how it protects
it put works since a protective put or
when you when you buy a put option that
is a negative Delta strategy which means
it profits when the stock price goes
down and when you own shares of stock
that's a positive Delta strategy which
makes money when the stock price goes up
and loses money when the stock price
goes down so when the stock price goes
down your long stock position is going
to lose money but the protective put
that you purchased is going to make
money so in this case we're just look
we're looking at the comparison between
the profits and losses of the long stock
position and the married put so as we
can see here since that put option is
increasing in value that is offsetting
the losses on the long stock position
and makes the protective puts profit and
loss less severe than just long stock
alone so at the worst-case scenario here
the long stock position was down about
five thousand dollars but our married
put position was only down around twenty
three hundred dollars so this just shows
you that if the stock price really Falls
owning that protective put is going to
be extremely beneficial because it's
going to limit your downside risk
alright so that pretty much sums up
everything you need to know about the
protective put strategy so let's go
ahead and summarize the main concepts
that you've learned from this video so
first of all a protective put consists
of buying a put option against a hundred
shares of long stock now a protective
put caps the loss on the long chairs but
increases the break-even price of the
position and as a result that lowers
your probability of making money on the
trade now to close a protected put
position you can sell the long shares
and the long put at their market prices
to lock in any profits or losses on the
strategy so you do not need to hold a
position to expiration
now if the long put is in the money at
expiration the trader will lose their
long stock position because they long
put expires to negative 100 shares of
stock so if you let the long put expire
in the money you'll effectively sell
your shares of stock at the puts strike
price realizing the maximum loss for the
strategy
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