A protective put strategy involves the acquisition of a put option on an asset already owned, providing financial insurance against a decline in its market price. In crypto, this means purchasing a put option on a held digital asset such as Bitcoin or Ethereum. It functions as a form of portfolio risk mitigation.
Mechanism
An investor holding a crypto asset buys a put option with a strike price typically below the current market price of the underlying asset. If the asset’s price decreases below the put’s strike price, the put option gains value, offsetting a portion of the losses incurred by the underlying asset. The premium paid for the put option reduces the overall return potential.
Methodology
This strategy serves as a direct risk management tool, establishing a floor for potential losses on a crypto holding without requiring its sale. It is employed by investors seeking to protect accrued profits or limit downside exposure in a volatile market. This method preserves long-term asset exposure while providing a mechanism for managing short-term price decline risk.
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