Ok, I’m still trying to figure this one out… Protective Put ---- buying a put option which allows you to sell the security at X should the price tank, S (aka portfolio insurance) The thing that gets me though is that is it has the “long call payoff diagram” (aka the hockey stick shape)
because you payoff if the stock tanks is flat all the way to $0 but you have the upward hockey stick shape because you still have the upside if the stock price rises - letting the put option expire worthless.
S+P= K/(1+RFR)^t+C
FlamesFan Wrote: ------------------------------------------------------- > because you payoff if the stock tanks is flat all > the way to $0 but you have the upward hockey stick > shape because you still have the upside if the > stock price rises - letting the put option expire > worthless. Ahhhh, got it! Thanks FlamesFan. I suppose Canadians are good at anything related to hockey sticks!!!
Example: Long call (no position in underlying) X = 20 C = 2 Separate Portfolio Long Stock: Buy at Market price = $20 Long Put: X = 20 P = 2 Long Call Payoff Underlying Price: $0-20: Payoff = -2 (option value = $0; lose the premium) After $20 Price, the payoff graph slopes upward at 45 degrees, Breakeven at underlying price of $22 Long Put and Long Stock Payoff Underlying Price: $0-20: Payoff = -2 In the $0-$20 Stock price range, the gain from the put will equal the loss from the stock, and you will lose the premium paid If the Stock Price is 10, the put payoff = (X-St) = $10. The Long stock position = -$10 (St – S; $10-$20) Any price above $20, the put is worthless, but you realize the gain from the stock position After $20 Price, the payoff graph slopes upward at 45 degrees, Breakeven at underlying price of $22
joemontana Wrote: ------------------------------------------------------- > Example: > > Long call (no position in underlying) X = 20 > C = 2 > > Separate Portfolio > Long Stock: Buy at Market price = $20 > Long Put: X = 20 > P = 2 > > Long Call Payoff > Underlying Price: $0-20: Payoff = -2 (option > value = $0; lose the premium) > After $20 Price, the payoff graph slopes upward at > 45 degrees, > Breakeven at underlying price of $22 > > > Long Put and Long Stock Payoff > Underlying Price: $0-20: Payoff = -2 > In the $0-$20 Stock price range, the gain from the > put will equal the loss from the stock, and you > will lose the premium paid > > If the Stock Price is 10, the put payoff = (X-St) > = $10. The Long stock position = -$10 (St – S; > $10-$20) > > Any price above $20, the put is worthless, but you > realize the gain from the stock position > > After $20 Price, the payoff graph slopes upward at > 45 degrees, > Breakeven at underlying price of $22 Amazing, how do you guys find the time to write out these elaborate examples in 5 min. It would take me an hour to give this reply. You’re better than Joe Montana!
UAECFA Wrote: ------------------------------------------------------- > FlamesFan Wrote: > -------------------------------------------------- > ----- > > because you payoff if the stock tanks is flat > all > > the way to $0 but you have the upward hockey > stick > > shape because you still have the upside if the > > stock price rises - letting the put option > expire > > worthless. > > > Ahhhh, got it! Thanks FlamesFan. I suppose > Canadians are good at anything related to hockey > sticks!!! Us Canadians sleep, eat & breath hockey…at least I used to before the CFA came in my life.