Strategies · Library · Options
§2.4Hedges and structures
Protective put
Buy shares and a put at or below today's price as insurance. If the stock drops the put pays, so the loss is fixed; if it rises you keep the gain minus the premium paid.
- Asset class
- Options
- Held for
- To expiry
- Data
- ARCANE has part of the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Bullish on the stock but wants a fixed floor on the loss, for example ahead of an event with a possible shock.
- Entry and exit
- Buy shares and buy one at-the-money or slightly out-of-the-money put per 100 shares with an expiry matching the worry period. Sell or let the put lapse once the risk has passed.
- Sizing
- 1:1 (one long put per 100 shares)
How it fails
- Worst loss is stock price minus strike plus the premium paid
- Premium drains return every period the insurance is held
- Time decay works against the put holder
- Upside unlimited but trimmed by the premium
Data it needs
- options chain with strikes and premiums
- underlying daily price
- dividends and borrow cost
ARCANE has the underlying daily close but no options chains, strikes or implied volatilities
How ARCANE uses it
Matches a Call that carries a stated downside tripwire, such as "the index will not close below a level before a date"; the put is the cost of being wrong. Paper only.
The put cannot be held; a stop rule or cash fallback only roughly mimics it.
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §2.4, p. 20 of the SSRN version. Described in our words. Hedges and structures is ARCANE’s filing, not the book’s.