Derivative Markets
Protect a share position with a put
Can you cap the loss on a stock while keeping the upside?
Practise protect a share position with a put with a worked example and a short check.
A put gives the holder the right to sell at a strike price. The protection costs a premium.
Expiry P&L = spot + max(strike − spot, 0) − initial share price − premium
At $82, the put is worth $13. $82 + $13 − $100 − $3 = −$8.
Buy the share for $100 and a $95 put for $3. At expiry spot of $82, the share and put together are worth $95, leaving an $8 loss.
At $82, the put is worth $13. $82 + $13 − $100 − $3 = −$8.
What is the combined profit if spot finishes at $112?