Protective put
Holding the bond and buying a put against it, so downside losses are capped at the premium while the upside stays open — unlike a short futures hedge, which removes gains along with losses.
This one is not written up yet
The definition above is the short version. A full explanation — how it works, a worked example and the exam traps — is still being written. In the meantime the chapter below covers it in context.
Written up from the same chapter
- ArbitragerA participant who locks a profit by entering opposite transactions in two markets at once — carrying no exposure and taking no view, and in the process pulling the two prices back together.
- Basis riskThe risk left over after hedging, because the exposure and the contract used to hedge it do not move identically — in size, in expiry date, or in what they are written on.
- Butterfly spreadA four-legged position — one option bought at a low strike, two sold at a middle strike and one bought at a high strike, all of the same expiry — that caps the unlimited loss of a short straddle.
- Covered callHolding the underlying in the cash market and writing a call against it — a way of earning premium income from a holding, at the cost of capping the gain above the strike.
- DeltaThe change in an option's premium for a one-rupee change in the underlying — the first and most used Greek, and the hedge ratio that says how much underlying to hold against an option position.
- Diagonal spreadTwo options of the same type on the same underlying with both a different strike and a different expiry — the most complicated of the three spread families, and the only one that varies on both axes.
Where this is taught
- Series VIII · Chapter 5: Strategies using Equity Futures and Equity Optionsintroduced here
- Series V-D · Chapter 22: Strategies using Interest Rate Derivativesintroduced here
- Series IV · Chapter 5: Strategies using Interest Rate Derivativesintroduced here
- Series I · Chapter 5: Strategies using Exchange Traded Currency Derivativesintroduced here
Related terms
- Put optionA contract giving its buyer the right, but never the obligation, to sell the underlying at a fixed strike price — insurance against a fall, bought for a premium.
- Butterfly spreadA four-legged position — one option bought at a low strike, two sold at a middle strike and one bought at a high strike, all of the same expiry — that caps the unlimited loss of a short straddle.
- Covered callHolding the underlying in the cash market and writing a call against it — a way of earning premium income from a holding, at the cost of capping the gain above the strike.
- Put-call parityThe arbitrage-free relationship binding a European call and put of the same strike and expiry to the spot and the discounted strike: c + X·e^(−rt) = p + S. Deviations create risk-free profit.
- HedgingTaking a derivative position that moves opposite to an exposure you already have, so gains on one offset losses on the other and the future rate is locked in at a known level.
- InsuranceThe risk-management approach that pays an explicit upfront premium to remove the downside while keeping the upside — which in derivatives means buying an option rather than selling a future.
- MoneynessWhether exercising an option right now would give the buyer a positive, zero or negative cash flow — classifying it as in the money, at the money or out of the money.
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