Protective Put Structures refer to an options strategy where an investor holds a long position in an underlying crypto asset and simultaneously buys put options on that same asset. The primary purpose of this structure is to limit potential downside losses on the asset while allowing for unlimited upside profit potential. It functions as a form of insurance against a significant price decline.
Mechanism
The operational mechanism of a Protective Put Structure involves the put option’s intrinsic value increasing as the underlying crypto asset’s price falls below the put’s strike price. This gain from the put option offsets losses from the declining asset. The cost of this protection is the premium paid for the put option, which reduces the overall profit if the asset appreciates or remains stable. This strategy requires access to a liquid options market.
Methodology
The methodology for implementing Protective Put Structures involves careful selection of the put option’s strike price and expiry date, balancing the desired level of downside protection with the premium cost. Institutional investors use this strategy to hedge existing spot positions or to protect profits in highly volatile crypto markets. Risk management protocols include monitoring the delta, gamma, and theta of the combined position to understand and manage the exposure to market movements and time decay.
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