Protective Put (LONG STOCK + LONG PUT)
In this strategy, we purchase a stock since we feel bullish about it, but what if the price of the stock goes down. You wish you had some insurance against the price fall. So buy a Put on the stock. This gives you the right to sell the stock at a certain price which is the strike price. The strike price can be the price at which you bought the stock (ATM strike price) or slightly below (OTM strike price).
Market Scenario: Bullish
Risk: Losses limited to Stock price + Put Premium– Put Strike price
Reward: Unlimited
BEP: Put Premium + Stock Price
EXAMPLE:
Entry:
Entry:
| STOCK | 5100 |
| | STRIKE | PREMIUM |
| BUY PUT | 5000 | 50 |
BEP = 5100 + 50 = 5150
On Exit if:
| SPOT | STOCK | PUT PAY-OFF | STRATEGY PAY-OFF |
| 4800 | -300 | 150 | -150 |
| 4900 | -200 | 50 | -150 |
| 5000 | -100 | -50 | -150 |
| 5100 | 0 | -50 | -50 |
| 5150 | 50 | -50 | 0 |
| 5200 | 100 | -50 | 50 |
| 5300 | 200 | -50 | 150 |
| 5400 | 300 | -50 | 250 |
| 5500 | 400 | -50 | 350 |
Protective Put - Strategy Pay-Off
No comments:
Post a Comment