Protective Put

· aka portfolio insurance or hedged port
· buy a long position in underlying securities + buy a put
· protects the downside risk at a cost
· Appropriate for limiting downside risk when upside potential is still present
· Think stock may go down in near future, want to preserve upside potential

Profit = max(0,X-S_T)+S_T-S₀-P₀
Max Profit = S_T-S₀-P₀ (no upside limit)
Max loss = -X+S₀+P₀
Breakeven price = X+P₀