The idea behind this option strategy is actually very simple. When the the stock price is falling down, the investor would not lose a lot of money because Option Put they have purchased giving them RIGHT to sell their stock at strike price. In another hand, when the stock price is rocketing up, investors are even happier to see the growth. But also keep in mind, this Protective Put strategy can potentially reduce profits from the increasing price of the stock, as much as Premium investors have paid to buy Option Put as protection.
How to Use Protective Put Strategy
The important key in Protective Put Strategy is choosing a best performing stock with high volatile according to its historical data. If you want to use this strategy, I would recommend choosing stocks from high volatile sectors, such as Technology and Biotech. Just believe me the Return of Investment (ROI) could be very profitable. Another thing to consider is its consistent growth during a certain period of time.
Protective Put Strategy Example
VISA (V) is currently traded in the market for $523.00. VISA is world's largest financial company that you believe their stock price will increase for a long term. Therefore, you buy 100 shares of VISA (V), which is $52300.00. In order to protect your investment, you buy Option Put at strike price $30 with Premium price $0,20 ($0,20 x 100 shares of VISA = $20).
According to the illustration above, your Break Event Point (BEP) is $52,320, and suppose when VISA (V) price falls below $523.00 you are getting loss to the bottom $30. But with Protective Put, your investment is always safe and above $2980.00 (strike price $3000 - premium price $20).
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