Explain a protective put: the objective it serves, how it is constructed, its expiry payoff and value, its profit and risks, the most it can gain or lose, and the underlying price at which it breaks even
The idea
A protective put is a long asset plus a long put, bought as insurance: the holder keeps the upside but sets a floor under value. Value at expiry is S + max(0, X − S); profit subtracts S0 and the premium p. Maximum loss is S0 − X + p, the deductible plus the premium. Maximum profit is unlimited; breakeven is S0 + p. With S0 = 50, X = 45 and p = 1.50, the worst loss is 6.50 and breakeven is 51.50. The key judgement is the strike: a lower one is cheaper but leaves a bigger deductible. The real risk is cost: repeated premiums drag on return.
In the app: 1 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
Take the free diagnostic →More in Options Strategies
- Show how a combination of options can reproduce the return profile of an underlying asset
- Explain a covered call: why an investor writes one, how it is built, its payoff and value at expiry, its risks and profit, the most it can gain or lose, and the underlying price at which it breaks even
- Contrast the deltas of a covered call and a protective put with that of an asset held long and hedged by a short forward
- Weigh buying a call against writing a put as ways to modify a short position in the underlying
- Explain, for bull and bear spreads, straddles and collars, the objective, structure, payoffs, risks, value and profit at expiry, maximum gain and loss, and the underlying price at which each breaks even
- Explain what calendar spreads are used for
- Interpret the volatility smile and skew
- Select and assess option strategies that fit a stated investment objective
- Show how options can be used to reach a chosen level of equity risk exposure