# Purchase of puts as hedging strategy

Coud one expert confirm if my understanding is correct here?

If I understood earlier, If I buy a put at strike price of 90 for 5 ( current stock price 100) and if the stock price goes below 90, I gain, correct?

So the max gain if stock price goes to 0 is 90 -5 = 85 ?

if I hold a concentrated position on stock and to hedge I buy a put and if stock price goes to zero , the max loss would be -100 + 85 = -15?

Thanks

no one?

If you have the protective put (hold Stock + buy put) max gain is not limited. Assuming you bought Stock at \$100.

If stock goes to 0, you will execute put option at (X-Premium), on \$85 so

(St - So) + Max (X-St)-P = (0-100) + (90-0) - 5 = - \$100 + \$85 = -\$15.

Correct. If you roll forward position, cost of put premium (insurance) will grow significantly over periods.

Thanks

Protective Put

Max Loss = Limited

Max Gain = Not limited

Due to position maintenance cost, quite expensive strategy.

Where are u guys getting 85? The strike is 90. Anything less than 90 you exercise the put.

Assuming you only bought the put for \$5 (no underlying stock) and the stock goes to 89 at expiry then you exercise the put and thus your loss would be 4. If you didn’t exercise you would lose the full \$5. Wouldn’t you rather lose the 4 instead of the 5??? Effectively your cost in the position is 105 (100 in the stock and 5 in the option). Protection lies below the strike thus your max loss is 105-90 (still the 15). The stock needs to go to 105 to break even on the trade. The max profit is theoretically unlimited as the price can go up forever.