Detailed Explanation of Protective Put Option Strategy

I. Definition:

The protective put option strategy is an options trading strategy. As the name suggests, this is a risk-hedging trading strategy. Specifically, this strategy involves a trader buying 1 unit of the underlying asset while simultaneously purchasing 1 put option on that same asset. This operation is designed to provide protection against a decline in the price of the purchased asset.

II. Strategy Details:

The protective put option strategy is typically used when a buyer expects the price of an already-purchased spot asset to rise, but is concerned that market volatility may cause the price to fall instead. Through the protective put option strategy, the spot position will have a capped loss, with the loss ceiling set at the strike price of the underlying put option. Therefore, the buyer employing this strategy faces unlimited profit potential and limited risk.

Generally, buyers purchase an at-the-money underlying put option to hedge potential losses on the spot position. An at-the-money put option is typically purchased alongside the spot asset, providing comprehensive protection until the option expires. The minimum price of this put strategy equals the strike price minus the cost of purchasing the option. When using options to protect existing or anticipated positions, if the held spot asset's price continues to rise, the option will not be exercised. This more flexible execution condition makes options more suitable than futures products for protecting spot positions in the same asset.

In summary, this strategy offers unlimited returns with limited risk. The maximum loss equals: strike price - underlying purchase price + premium. The strategy's characteristics are as follows:

1) Locks in the minimum net proceeds and minimum net profit/loss;

2) Reduces net profit/loss expectations; when the stock price rises, the returns are lower than those from a single investment in the underlying asset;

3) Combined net profit/loss = combined net proceeds at expiration - initial investment

When the underlying asset price < strike price:

Combined net profit/loss = strike price - (initial underlying purchase price + option purchase price)

When the underlying asset price > strike price:

Combined net profit/loss = underlying asset sale price - (initial underlying purchase price + option purchase price)

Institutional investors can also use the protective put option strategy to gain protection in the event of a decline in the underlying asset price.

III. Trading Details:

The following conditions must be met to execute this strategy:

1) Regarding legs:

There can only be two legs, and Leg 1's buy/sell direction = Leg 2's buy/sell direction — both must be buys. Additionally, Leg 1's underlying = Leg 2's underlying. In other words, the protective put option strategy can only consist of one spot position and one underlying put option.

2) Regarding instrument types:

Instrument type = put option / spot

Instrument type ≠ call option / option / perpetual contract / leverage

3) Regarding notional value:

The notional value of the base currency in the put option = the spot notional value, meaning the notional value of the base currency in the put option must be the same as the spot notional value.

4) Regarding net strategy price:

Net strategy price = put option premium + spot purchase price at entry

5) Regarding margin:

No additional margin requirements.

IV. Specific Trading Examples:

Assume the protective put option strategy is currently being executed. The trading details are as follows:

Leg 1 (+1): Buy BTCUSD-20221126-P-50,000

Leg 2 (+1): Buy BTCUSDT-S-50,000

Leg 1 price: 20

Net strategy price: 50,000 + 20 = 50,020

The following two scenarios will occur:

Scenario 1: The price at expiration equals or falls below Leg 1's strike price

BTC price on the put option expiration date = 45,000

At expiration, Leg 1 is in-the-money; the buyer profits from Leg 1 but must pay for losses incurred from Leg 2:

(Underlying price at put option expiration - spot purchase price) + (put option strike price - underlying price at put option expiration) - put option premium

Scenario 2: The price at expiration is above Leg 1's strike price

BTC price on the put option expiration date = 55,000

At expiration, Leg 1 is out-of-the-money; the buyer profits from Leg 2 but must pay for losses incurred from Leg 1:

(Underlying price at put option expiration - spot purchase price) - put option premium

Disclaimer

This article may contain product-related content that does not apply to your region. This article is dedicated to providing general information only and does not accept responsibility for any factual errors or omissions herein. This article represents the author's personal views only and does not constitute the views of OKX. This article is not intended to provide any advice, including but not limited to: (i) investment advice or investment recommendations; (ii) offers or solicitations to buy, sell, or hold digital assets; or (iii) financial, accounting, legal, or tax advice. Holding digital assets (including stablecoins) involves a high level of risk, may be subject to significant volatility, and may even become worthless. You should carefully consider whether trading or holding digital assets is appropriate for you based on your financial situation. For questions regarding your specific circumstances, please consult your legal/tax/investment professional. The information contained in this article (including market data and statistics, where applicable) is provided for general reference purposes only. Although all reasonable precautions have been taken in preparing such data and charts, we assume no responsibility for any factual errors or omissions expressed herein. © 2025 OKX. This article may be reproduced or distributed in its entirety or with excerpts of 100 words or less, provided that such use is non-commercial in nature. Any reproduction or distribution of the full article must prominently state: "This article is copyrighted © 2025 OKX, used with permission." Permitted excerpts must cite the article title and include attribution, for example "Article Title, [Author Name (if applicable)], © 2025 OKX." Some content may have been generated or assisted by artificial intelligence (AI) tools. Derivative works and other uses of this article are not permitted.

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