1. Put options: Putting on a “bulletproof vest” for assets

The essence of a protective put option is to use premiums to cover risks. When investors hold underlying assets such as stocks, futures or cryptocurrencies, they can buy a corresponding number of put options to lock in the risk of decline within a controllable range.

This strategy is like buying a "property insurance" for your position - if the market plummets, the option income can hedge the losses; if the market rises, only a small amount of premium cost will be lost.

Take the US stock market as an example: suppose you hold 100 shares of Apple (currently priced at $180 per share) and are worried about the stock price fluctuation after the financial report, you can buy a put option with an exercise price of $170 and an expiration date of one month, paying a premium of $5 per share (total cost of $500). If Apple's stock price falls to $150, the option allows you to sell it at $170, reducing the loss per share from $30 to $10 (including the premium); if the stock price rises to $200, you will only lose $500 in premium, and the stock profit will still reach $2,000.

2. Construction method: three steps to lock the safety margin

Step 1: Select “Insurance Subject”

The underlying asset must be highly correlated with the position. US stock investors can choose individual stocks or ETFs (such as S&P 500 index options), while the crypto market needs to match the underlying assets (such as Bitcoin spot positions corresponding to Bitcoin options). For example, if you hold 10 Bitcoins (currently priced at $60,000 per Bitcoin), you should choose a currency-based option contract instead of a US dollar-settled contract to avoid exchange rate interference.

Step 2: Set up “insurance terms”

Key parameters include:

• Strike price: determines the level of protection. Out-of-the-money options (strike price is lower than the current price) have low cost but weak protection, at-the-money options (strike price ≈ current price) have moderate cost, and in-the-money options (strike price is higher than the current price) have strong protection but high cost. It is generally recommended to choose slightly out-of-the-money options (such as 5%-10% drop in the current price).

• Expiration date: Cover the risk window period. If it is a short-term event (such as financial report, Federal Reserve interest rate meeting), choose options expiring within 1 month; if it is a long-term position (such as holding Bitcoin until the halving cycle), choose quarterly contracts.

Step 3: Calculate the break-even point

Formula: holding cost + premium expenditure.

For example, if the cost of buying Tesla stock is $800 per share and a $20 premium is paid to buy a put option with an exercise price of $750, the break-even point is $820. The stock price needs to rise above $820 to make a profit, but the maximum loss when it falls is locked at (800-750+20) = $70 per share.

3. Applicable scenarios: solutions to three typical dilemmas

1. "Safety belt" for long-term holdings

In the US stock market, it is common in retirement account heavy holdings (such as Berkshire and Microsoft), and the crypto market is suitable for believers in hoarding coins. For example, investors holding Bitcoin spot can buy quarterly put options before each halving to hedge the risk of decline caused by short-term miner selling pressure while retaining long-term upside space.

2. “Smart Risk Control” to Replace Stop Loss

Traditional stop-loss orders are easily triggered by market fluctuations. In March 2024, Nvidia's stock price plummeted from $950 to $890 due to rumors of AI regulation, and then rebounded quickly. Investors who used stop-loss orders were forced to sell at a loss, while those who used protective put options only lost the premium and eventually made a profit when the stock price rebounded to $1,000.

3. The “profit-stopping tool” for profit protection

When the position has floating profit, use part of the profit to buy put options. For example, after Coinbase's stock price rises from $80 to $200, investors can use 10% of the profit to buy a put option with an exercise price of $180. If the stock price falls back to $150, the profit corresponding to the exercise price of $180 is still retained; if it continues to rise to $250, only 10% of the profit is sacrificed as insurance cost.

4. The “Double-Edged Sword” Effect of Strategy

The core of protective put options is not to predict the direction, but to use the certainty of cost to exchange for the confidence of holding the position. The real masters often "lay out defense in optimism and maintain offense in panic."

Advantages: Extreme risks are controllable, avoiding margin calls or mental breakdown, and retaining rising profits. It is suitable for trend followers and is simple to operate without frequent position adjustments.

Limitations: Premium consumption may erode profits (especially in volatile markets). Accurate matching of underlying assets, strike prices and expiration dates is required. Crypto options have large liquidity differences and spreads may be high.

5. Next Issue Preview

Tomorrow we will continue to focus on: Straddle/Wide Straddle Strategy Homework

1. Scenario calculation: Assume that you hold 100 shares of Google stock (currently priced at $160) and buy a put option with an exercise price of $150 and a premium of $8. Please calculate: • Profit and loss when the stock price drops to $140 • Profit and loss when the stock price rises to $180 • Break-even point

2. Practical observation: On the Deribit platform, find the current price of Bitcoin, compare the premium costs of put options with different strike prices (at the money, 5% out-of-the-money, 10% out-of-the-money), and analyze the differences in cost-effectiveness.