Hi guys.
So, protective put, long stock & long put.
Why is the max loss the depreciation of the stock you bought to the strike of the put, and the premium? The premium is clear, you lose it if you cannot exercise the option, because it is anyway a price you paid.
I thought that in this case the max loss is only the premium?
Many thanks,
C
The maximum loss on a put option is the premium.
The maximum loss on a protective put – a portfolio comprising a put option and a share of stock – is the maximum loss on the put option plus the maximum loss on the share of stock (because the maxima can occur simultaneously).
Your put will start insure you only below the strike price. It will not ensure you until the asset is drops to the strike.
For example, current price of the asset is 10, you buy put with the strike 9 for 0.5. So if the asset drops to 0 then you will lose:
10 (asset) - 9 (strike) + 0.5 (Premium) = 1.5.
In another case if you bought put with the strike 10 you would lose the premium only (0.9):
10 (asset) - 10 (strike) + 0.9 (premium) =0.9