What is a "protective put" strategy?

A "protective put" strategy involves purchasing a put option while simultaneously holding a long position in the underlying asset. This strategy serves as a form of insurance against a decline in the asset's price. By buying the put option, the investor secures the right to sell their asset at a predetermined price, which can help limit potential losses if the market moves unfavorably.

For instance, if an investor owns shares of a stock that they believe has long-term potential but is concerned about short-term volatility, they might buy a put option. This option can mitigate losses during downturns, allowing the investor to either sell their stock at the strike price of the put or hold onto the asset in hopes of recovery.

This strategy particularly aligns with risk management principles, aiming to protect capital while allowing for the possibility of gains from the long position. The other options do not accurately describe the protective put strategy; for instance, buying a call relates to leveraging gains without protective measures, selling an option tends to generate income rather than provide downside protection, and short selling involves betting against an asset rather than maintaining a long position.