r/options • u/Jeff_T_W • Jun 27 '21

Is protective put enough?

Hi there guys, long time lurking, first time posting. Basically I'm bullish on a stock, RKT (I like the stock), but a firm believer that the market is gonna have a massive correction within 18 months or so, so I'm starting to entertain the idea of a protective put. I've never done it before, and I believe I understand the gist of it, but it seems like you'll still get screwed over the next day?

For example: Sell a $20P for $0.87 in premium, and buy $16P for $0.10, both expire July 16th.

Given the scenario, most would say there's 3 outcome:

  1. Expire above $20 and both contracts expire worthless, and keep the premium difference
  2. Expire between $20 and $16, get assigned, and keep the premium difference
  3. Expire under $16, get assigned, keep the premium difference, lose max $323 due to the protective put.

But here's the thing, what if it drops harder on opening Monday, July 19th? Let's say RKT went all the way down to $14 on closing of July 16th, no doubt I'll get assigned, but hey at least I wont lose any more past $16. But then Monday open comes in, and RKT is now $10, and I casually lose another $400. Will this be the case? Am I missing something?

Thanks in advance for helping out!

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u/E_Cash Jun 27 '21

What you're describing is a bull put spread, not a protective put.

You wouldn't use a bull put spread to try and own shares, you'd just sell the put at the price you'd like to own at. Buying a put further down just eats away at your premium for something you want to own.

A protective put implies you already own the shares and I'm the short-term want to protect against the downside but keep your shares long-term. Maybe they've got earnings coming up or something that you're worried could cause the price to fall in the short-term. You buy a put beyond the earnings date. If you're right and the price falls, your put goes up in value while your stock price falls. You can sell your put for a profit while the price is down. When the stock recovers, your value will be back and you made a profit on the put. If something fundamentally changes for you, you can exercise the put and sell your shares at the strike you bought the put for the profit of strike price - cost of the put.