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Protective put option

Protective put option assumes that buying a certain stock is followed by buying put option on that stock. That way, the investor is protecting himself of falling of stock prices. Put option provides the profit if the stock price falls below the strike price. If the stock price is higher than the strike price, the put option is worthless, but the investor has a gain on stock.

For example, let's say that an investor bought stocks for 100$ and put option with strike price of 100$. If the stock price falls for example on 95$, the investor realizes a loss on the stock of the 5$, but also gain on the option of 5$ (X - S = 100-95 = 5). So a minimum value of portfolio is fixed to 100$. If the stock price advances, the option is worthless, but the investor realizes a profit on stocks.

< Hedging
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