Options Fundamentals: Protective Put Strategy

What is an Option:
It is a contract that gives the holder the right, but not the obligation, to buy an asset at a strike price by a certain date. A “call” gives the holder the right to buy an asset while the “put” gives the holder the right to sell an asset. And those who are involved in the market and trading of a contract are the buyers and sellers of the calls or puts. 

Protective Put Strategy: 
The investor would have a long position in both the security as well as the option. The intention is to use the put option derivative as an insurance limit to your loss.  The tradeoff for the insurance is some loss of value, if there is an increase in price. In theory: Profit has infinite possibilities while loss is limited at the strike price.

Variables:
· Vo = Initial Investment
· Vt = Current Portfolio Value
· π = Profit
· K = Strike Price
· St = Current Stock Price
· Po = Put Price per share

Value of the Strategy:
· Vo = So + Po
· If K > St then  Vt = K
· If K < St then  Vt = St