Protective Puts
Buying a put on stock you own — insurance that locks in a minimum sale price (the strike) while leaving the upside open; the premium is the cost of the protection.
On the exam the tell is a phrase like “owns the stock and wants to limit downside while keeping upside” — that combination points to the protective put. Watch the directional trap: a lone put buyer is normally bearish, but the protective-put buyer is bullish on the stock and only buying insurance, so questions reward you for separating motive (long-term bull) from the position (long put). The breakeven is stock purchase price + premium — higher than the stock alone, because you paid for protection. Distinguish it from a long put used as pure speculation, where the put stands alone and breakeven is strike − premium.
The most-missed contrast is covered call versus protective put: the covered call generates income (the premium received) but gives only premium-deep, limited downside protection and caps the upside, whereas the protective put costs premium yet sets a fixed loss floor and leaves the upside open. A protective put is the textbook hedge against the market (systematic) risk on a single position that diversification cannot remove. Memory hook: a put is a floor under your stock.
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