Protective Put
Owning the underlying and buying a put option as insurance against downside loss.
Protective put: long stock + long put. Creates a floor at K — if stock falls below K, the put payoff offsets the loss. Maximum loss = S − K + premium. Upside is unlimited. Breakeven = S + premium. CFA notes the payoff is equivalent to a long call (same shape after put-call parity). Used for downside protection when the investor wants to retain upside exposure but fears a short-term correction.
Related Terms
Put-Call Parity
The no-arbitrage relationship between European call and put prices: C − P = S·e^(−δT) − K·e^(−rT).
Covered Call
Owning the underlying asset and selling a call option against it to generate premium income.
Collar
Long stock + protective put (lower K) + covered call (higher K) — bounded return with downside protection.