Protected Puts

Overview:

Protective puts are typically thought of as insurance to an investor investing in the underlying stock. The strategy is employed by purchasing a put option and the underlying stock. Typically the strike price will be below the stock price.

Main Uses:

1. The first reason an investor would invest in a protective put is investment protection. Typically the investor will already own the underlying security, which has done very well, before purchasing the protective put. If the investor is concerned the underlying stock price will drop, but still wants to keep the underlying stock, the investor will purchase a put option to limit the potential loss, thereby locking in profits from the underlying.
2. The second reason an investor would invest in a protective put is as an alternative to stop order. Stop orders can be very tricky depending on your broker. A simple way around the problems with stop order is to purchase a protective put.

Profit / Loss Protective Puts:

The below graph is a profit / loss graph of a protective put using the OptionsHouse P&L calculator. The current stock price is $114.69. A put option with a strike price of $108 was purchased. Additionally, the underlying stock was purchased with at a price of $114.60. The break-even price is $114.74. The investor limits their returns by the cost of the put. However, the protective put protects against the stock decreasing significantly in value.

Recent Trading Ideas Using the Protected Put  Strategy

Talbots, Inc. (TLB) Cash-Secured Put
Corinthian Colleges, Inc. (COCO) Cash-Secured Put
Northern Oil & Gas, Inc. (NOG) Cash-Secured Put
Silver Wheaton Corp. (SLW) Cash-Secured Put
Origin Agritech Ltd. (SEED) Cash-Secured Put

Recent Articles Related to Protected Puts

Gold Opportunity: 5 Bullish Forces Mean “Buy the Dips”
Buy Extreme Pessimism, Sell Extreme Optimism
Put Buyers in Heavy Equipment Industry
AIG, CNBC and the Short Put
What Does Skew Have to Do With Options?
Educational Content Related to Protected Puts