The Protective Put Model is a risk management strategy involving the purchase of a put option on an asset already owned by an investor. This strategy acts as an insurance policy, limiting potential downside losses while allowing the investor to retain exposure to upside gains. In crypto investing, this model applies to holding a digital asset while simultaneously buying a put option on that asset to hedge against price depreciation.
Mechanism
The operational architecture of the Protective Put Model combines a long position in an underlying asset with a long put option. Should the asset’s price fall below the put’s strike price, the put option gains value, offsetting losses from the underlying asset. The mechanism caps the maximum loss at the difference between the asset’s purchase price and the put’s strike price, plus the premium paid for the option. This provides a floor for the portfolio’s value, preserving capital during market downturns.
Methodology
The strategic rationale for employing the Protective Put Model in crypto is to safeguard existing digital asset holdings against significant price declines, a common concern given crypto market volatility. Institutional investors utilize this methodology to manage portfolio risk, particularly for large-cap cryptocurrencies or specific token allocations. This approach provides a defined risk profile, enabling investors to maintain long-term asset exposure with a known maximum drawdown, enhancing capital preservation without sacrificing potential appreciation.
A lack of marketability structurally impairs a private share's value by introducing a quantifiable discount reflecting its illiquidity and delayed conversion to cash.
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