The last shaded column calculates the net payoff of the protective put option. Here are some key inferences that we can draw.
a) The maximum loss of this protective strategy is Rs.55. This is the total of the Rs.15 paid as put premium and the Rs.40 gap between your futures buy price and the put strike. This is obviously not acceptable and hence your strike price should be much closer to your futures price to reduce the maximum loss.
b) The breakeven point for the protective put strategy is Rs.1215 which is the futures buy price plus the premium on put option. Above this level breakeven level of Rs.1215, the profits will be unlimited
c) There is an important point to remember. When the price of Reliance goes above Rs.1160, the put option becomes out-of-the-money (OTM). When an option becomes OTM, it only has time value and that time value can erode quite rapidly. As a trader, you need to be cautious about this aspect. In a nutshell, the protective put is a good method of limiting your downside risk at the same time maintaining a bullish position on the stock. Your expected price movement should be strong enough to cover the additional cost of put premium.
Disclaimer: The above opinion is that of Ms. Sneha Seth (Derivatives Analyst - Angel Broking) & is for reference only.
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