Protective Put Options

A protective put is an options strategy where an investor holds a long position in an underlying asset and simultaneously purchases a put option for that same asset. This strategy acts like an insurance policy for the investor.

If the price of the asset drops below the strike price of the put option, the option gains value, offsetting the losses incurred by the underlying asset. The investor pays a premium for this right, which represents the cost of the insurance.

In cryptocurrency markets, this is a vital tool for protecting against flash crashes or sudden liquidity events. The maximum loss is limited to the cost of the put premium plus the difference between the asset price and the strike price.