Protective Put

A Protective Put is a hedging strategy where you buy a put option to protect a long position in the underlying. It limits losses if the price unexpectedly falls.

• Ideal for bullish conditions, where there is a risk of price falling.
• Buying a slightly OTM put provides cost-effective protection.
• Limits potential losses on the long position while retaining upside profit potential.
• Risk is limited to the premium paid for the put option.

Example:

• BANKNIFTY trading at 42,000.
• You hold 1 lot of BANKNIFTY Futures (lot size = 25) at 42,000.
• Buy 41,800 Put (OTM) at ₹120 with a near-month expiry.
• Outcome:
  1. If BANKNIFTY stays above 42,000 at expiry:
     • No impact from the put; you profit from the futures.
  2. If BANKNIFTY falls to 41,700 at expiry:
     • Loss on futures = ₹7,500.
     • Gain from the put = ₹2,500.
     • Net loss = ₹7,500 − ₹2,500 = ₹5,000.
  3. If BANKNIFTY falls to 41,600 at expiry:
     • Loss on futures = ₹10,000.
     • Gain from the put = ₹5,000.
     • Net loss = ₹10,000 − ₹5,000 = ₹5,000 (limited by the put).