A Protective Put is a fundamental options strategy employed by investors who own an underlying asset and wish to hedge against potential downside price movements, effectively establishing a floor for their holdings. It functions as an insurance policy for an existing long position.
Mechanism
Operationally, the strategy involves holding a long position in a crypto asset, such as Bitcoin or Ethereum, and simultaneously purchasing a put option on that same asset. If the price of the underlying crypto asset declines below the put option’s strike price, the put gains intrinsic value, which then offsets the losses incurred on the long asset position.
Methodology
The methodology of a protective put allows investors to participate fully in any potential upside appreciation of their crypto asset while explicitly limiting their maximum loss to the cost of the put option plus any loss from the current price to the strike price. This strategy is invaluable in highly volatile crypto markets for institutional portfolios seeking to manage risk and preserve capital without liquidating their core digital asset holdings.
Mastering DeFi's impact on institutional crypto options requires re-architecting execution frameworks for superior liquidity, risk control, and capital efficiency.
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