Options Trading Strategies: Protective Put
A protective put, also called a married put, is a hedging options trading strategy where a trader, holding a BTC/ETH, purchases an At The Money put option to protect against potential depreciation in the underlying assets price.
A protective put strategy is also called a synthetic long call because its profit and loss profile is the same as in the long call strategy.
When to use this strategy?
You are bullish and own the underlying assets, but you want to be protected against a price drop.
Below is a Profit and Loss chart example of a protective put options strategy:
Pros:
Buying the put insures your long position on underlying asset against a rapid price drops. Maximum profit is unlimited.
Cons:
The only con of this low risk strategy is its cost, as you have to buy both put and the underlying asset so it may not pay off. Also, frequent buying of protective puts can create heave on your profits especially in case of the expensive premiums.
Example:
In this example, BTC is trading at 43,822.31 USD. You have bought a BTC at 43,536.50 USD and bought an At The Money put with a strike price of 44,000.00 USD, an expiration date of February 9th 2022, and for a premium of 655.17 USD.
Upon expiration:
The wanted situation at expiration is for the BTC price to rise significantly, as the trader would benefit from the long position (owning the BTC), regardless of the paid premium.
On the other hand, if the spot price falls beyond or at the strike price your maximum loss will be the price you have paid for BTC, minus the strike price of the put, plus the premium.
| BTC at Expiry (USD) | Payoff (USD) |
|---|---|
| 44,000.00 (strike price) | -191.67 (max loss) |
| 44,055.00 | -360.62 |
| 44,030.00 | -188.62 |
| 44,158.00 | -95.62 |
| 44,191.67 (break even) | 0 |
| 44,469.00 | +277.33 |
| 45,137.00 | +945.33 |
| 46,130.00 | +1,938.33 |
| 46,690.00 | +2,498.33 |