What is a protective put strategy?

• A. Long stock plus long put to hedge downside risk
• B. Long stock plus long call to hedge upside risk
• C. Short stock plus short put
• D. Long put plus cash

Answer: (A)

Protective put involves holding the underlying stock and purchasing a put option on the same stock. The put acts as downside insurance: if the price falls, you can exercise the put to sell at the strike price, putting a floor on your losses. Meanwhile, if the stock climbs, you still participate in the upside, minus the cost of the put premium. This combination is the best fit for hedging downside risk while keeping upside potential intact, which is exactly what a protective put is designed to do. The other options either hedge the wrong risk or exclude stock ownership, so they don’t provide the same protection.