Protective Puts: A Hedging Strategy

A protective put position is created by buying (or owning) an asset and buying put options with a strike price equal or close to the current price of the asset.

A protective put strategy is analogous to the nature of insurance. The main goal of a protective put is to limit potential losses that may result from an unexpected price drop of the underlying asset.

Adopting such a strategy does not put an absolute limit on the potential profits of the investor. Profits from the strategy are determined by the growth potential of the underlying asset. However, a portion of the profits is reduced by the premium paid for the put.

Example of Protective Put

You own 100 ETH, with each ETH valued at $500. You believe that the price of ETH will increase in the future. However, you want to hedge against the risk of an unexpected price decline. Therefore, you decide to purchase 100 protective put contracts with a strike price of $500. The premium of one protective put is $10.

Check the introduction video below.

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Ryan, thanks a lot for showing this hedge strategy. I’ve been learning quite a bit from your content. :grinning:

This protective put only works for physical settled options, right?
If I want to use as insurance, I’d have the right to sell the underlay asset in case of price decline.

The cash settlement also works for this kind of strategy.

You’re saying that the protective put could be used in both cases: cash or physical settlement.
1- For physical settlement, I’d sell the underlying asset (the way Opyn works).
2- For cash settlement, I’d profit from the difference (the way Hegic/FinNexus works).

I think I’m missing something there. I’ll keep digging…

You got it. In either case, you are protected by the option contract.

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