Question

3) Explain what is meant by a protective put strategy when holding a specific long stock position. How might the overall outcome of this strategy differ from just holding a long position in that stock. Consider the cases of either a higher close or a lower close when the option expires.

3a) What sort of market behavior might lead to a positive or a negative outcome to an investor with a short straddle position. Be specific about prices.

Answer 1

3. Protective put option is characterized by holding the investment position in the the asset and buying a put option so that any event of adversity on the downside can be avoided through appreciation in the put option.

This can differ from just holding a long position on this stock because long position would have been a naked position without no hedging and put position on that long position is providing up with a specific hedge

It is generally done by investor in order to hedge their portfolio.

3b.when there is a short straddle, it means the call option and put option are both sold of a stock so the investor is expecting to gain through the premium and when there is rise in the volatility of the stock and the rise of the volatility is higher, so there will be losses higher than the premium amount because movement would be higher than sum of both the premium amount.