Protective Put

A protective put is used primarily to:

1. A.Generate premium incomePremium income comes from writing options and collecting the premium. A protective put is bought, so the cash flows out rather than in, and the sign is backward. The description given here fits a covered call instead.
2. B.Increase leverageAdding a put to a long stock position shrinks net exposure rather than magnifying it, leaving less downside than holding the shares alone. Leverage would mean controlling more stock per dollar, not insuring what is already owned.
3. C.Limit downside risk on a long stock positionCorrect - it insures a long position.
4. D.Speculate on a price declineTrue of a standalone long put, which is exactly why it tempts. But protective specifies the put is held against shares the customer already owns, so a decline damages the stock and the put only offsets it. The motive is insurance on an existing position, not a bearish bet.

Why: Buying a put against a long stock position limits downside risk (a hedge).

A client wanting to limit the downside on a long stock position could use:

1. A.Buying more of the same stockBuying more shares increases the position size, which magnifies the downside rather than limiting it. Averaging down feels protective because it lowers the cost basis, but it raises total dollars at risk.
2. B.Selling a covered callSelling a call against the shares collects premium, but the protection stops at the premium received and the upside is surrendered above the strike. It does not limit a real decline.
3. C.A protective putCorrect - a put insures the long position.
4. D.Shorting an indexShorting an index does hedge broad market exposure, so it is partly defensible as a portfolio-level tactic. It leaves the stock's company-specific risk untouched and creates unlimited loss potential if the market rallies, whereas a put's cost is capped at the premium.

Why: A protective put caps downside risk on a long stock position.

A married put strategy consists of:

1. A.Shorting stockA married put starts by buying stock. Shorting is the opposite side of that trade and creates a bearish position, while the married put is a bullish holding with a floor placed underneath it.
2. B.Selling stock and selling a putBoth legs are reversed here. The married put buys stock and buys a put; selling a put instead collects premium and takes on an obligation to purchase shares, which adds risk rather than insuring against it.
3. C.Buying two callsTwo calls form a purely directional bet with no stock in the position at all. A married put pairs actual shares with a put, and those shares are the thing the put exists to protect.
4. D.Buying stock and buying a protective put at the same timeCorrect - stock plus a protective put.

Why: A married put is buying stock and simultaneously buying a protective put on it.

A client wanting downside protection on a concentrated stock position can use:

1. A.LeverageLeverage magnifies the loss on the position it is applied to. Adding borrowed money to an already concentrated holding increases the exposure the client is trying to contain.
2. B.A protective put or collarCorrect - option-based downside protection.
3. C.Nothing is possibleSeveral established techniques address this exact situation, including protective puts, collars, and exchange funds. Concentrated-position management is a routine part of advisory practice.
4. D.More of the same stockBuying more deepens the concentration rather than hedging it. The problem in the stem is too much exposure to one company, and this makes that worse.

Why: A protective put (or a collar) limits downside on a concentrated position.