Explain the concept of a protective put strategy.

A protective put strategy is an investment strategy used in the options market to protect against potential losses in the value of an underlying asset. It involves purchasing a put option on the asset, which gives the holder the right to sell the asset at a predetermined price (known as the strike price) within a specified period of time.

The purpose of a protective put strategy is to provide downside protection for an investor's existing long position in the asset. By purchasing the put option, the investor has the ability to sell the asset at the strike price, regardless of its actual market value. This ensures that the investor can limit their potential losses if the asset's price declines.

For example, let's say an investor owns 100 shares of a stock currently trading at $50 per share. To protect against a potential decline in the stock's value, the investor purchases a put option with a strike price of $45 and an expiration date of one month. This put option gives the investor the right to sell the stock at $45 per share within the next month.

If the stock's price drops to $40 per share within the month, the investor can exercise the put option and sell the stock at the higher strike price of $45, limiting their loss to $5 per share. Without the protective put strategy, the investor would have experienced a larger loss of $10 per share.

However, if the stock's price increases or remains above the strike price, the investor can choose not to exercise the put option and instead continue to hold the stock, potentially benefiting from any further price appreciation.

In summary, a protective put strategy is a risk management technique that allows investors to protect their long positions in an asset by purchasing put options. It provides downside protection by limiting potential losses while still allowing for potential gains if the asset's price increases.