Option Strategies

Protective Put

Introduction

A Protective Put consists of buying a long position in a stock and a long position in put Options for the same amount of stock. Protective puts aim to hedge the long position of a stock with a long ATM or slightly OTM put Option. At any time for American Options or at expiration for European Options, if the stock moves above the strike price, the Option contract becomes worthless but the long stock position acquires an unrealized gain. If the underlying price moves below the strike, you can exercise the Options contract, which sells your underlying position at the put Option strike price.

Implementation

Follow these steps to implement the protective put strategy:

  1. In the Initialize method, set the start date, end date, starting cash, and Options universe.
  2. private Symbol _put, _symbol;
    
    public override void Initialize()
    {
        SetStartDate(2014, 1, 1);
        SetEndDate(2014, 3, 1);
        SetCash(100000);
        UniverseSettings.Asynchronous = true;
        var option = AddOption("IBM");
        _symbol = option.Symbol;
        option.SetFilter(-3, 3, 0, 31);
    }
    def Initialize(self) -> None:
        self.SetStartDate(2014, 1, 1)
        self.SetEndDate(2014, 3, 1)
        self.SetCash(100000)
        self.UniverseSettings.Asynchronous = True
        option = self.AddOption("IBM")
        self.symbol = option.Symbol
        option.SetFilter(-3, 3, 0, 31)
        self.put = None
  3. In the OnData method, select the Option contract.
  4. public override void OnData(Slice slice)
    {
        if (_put != null && Portfolio[_put].Invested) return;
    
        if (!slice.OptionChains.TryGetValue(_symbol, out var chain)) return;
    
        // Find ATM put with the farthest expiry
        var expiry = chain.Max(x => x.Expiry);
        var atmPut = chain
            .Where(x => x.Right == OptionRight.Put && x.Expiry == expiry)
            .OrderBy(x => Math.Abs(x.Strike - chain.Underlying.Price))
            .FirstOrDefault();
    def OnData(self, slice: Slice) -> None:
        if self.put and self.Portfolio[self.put].Invested:
            return
    
        chain = slice.OptionChains.get(self.symbol)
        if not chain:
            return
    
        # Find ATM put with the farthest expiry
        expiry = max([x.Expiry for x in chain])
        put_contracts = sorted([x for x in chain
            if x.Right == OptionRight.Put and x.Expiry == expiry],
            key=lambda x: abs(chain.Underlying.Price - x.Strike))
    
        if not put_contracts:
            return
    
        atm_put = put_contracts[0]
  5. In the OnData method, call the OptionStrategies.ProtectivePut method and then submit the order.
  6. var protectivePut = OptionStrategies.ProtectivePut(_symbol, atmPut.Strike, expiry);
    Buy(protectivePut, 1);
    
    _put = atmPut.Symbol;
    protective_put = OptionStrategies.ProtectivePut(self.symbol, atm_put.Strike, expiry)
    self.Buy(protective_put, 1)
    
    self.put = atm_put.Symbol

    Option strategies synchronously execute by default. To asynchronously execute Option strategies, set the asynchronous argument to Falsefalse. You can also provide a tag and order properties to the Buy method.

    Buy(optionStrategy, quantity, asynchronous, tag, orderProperties);
    
    self.Buy(option_strategy, quantity, asynchronous, tag, order_properties)
    

Strategy Payoff

The payoff of the strategy is

$$ \begin{array}{rcll} P^{K}_T & = & (K - S_T)^{+}\\ P_T & = & (S_T - S_0 + P^{K}_T - P^{K}_0)\times m - fee \end{array} $$ $$ \begin{array}{rcll} \textrm{where} & P^{K}_T & = & \textrm{Put value at time T}\\ & S_T & = & \textrm{Underlying asset price at time T}\\ & K & = & \textrm{Put strike price}\\ & P_T & = & \textrm{Payout total at time T}\\ & S_0 & = & \textrm{Underlying asset price when the trade opened}\\ & P^{K}_0 & = & \textrm{Put price when the trade opened (credit received)}\\ & m & = & \textrm{Contract multiplier}\\ & T & = & \textrm{Time of expiration} \end{array} $$

The following chart shows the payoff at expiration:

Strategy payoff decomposition and analysis of protective put

The maximum profit is $S_T - S_0 - P^{K}_0$, which occurs when the underlying price is above the $S_0 + P^{K}_0$.

The maximum loss is $P^{K}_0$, which occurs when the underlying price drops.

Example

The following table shows the price details of the assets in the algorithm:

AssetPrice ($)Strike ($)
Put1.53185.00
Underlying Equity at start of the trade187.07-
Underlying Equity at expiration190.01-

Therefore, the payoff is

$$ \begin{array}{rcll} P^{K}_T & = & (K - S_T)^{+}\\ & = & (185 - 190.1)^{+}\\ & = & 0\\ P_T & = & (S_T - S_0 + P^{K}_T - P^{K}_0)\times m - fee\\ & = & (190.01 - 187.07 + 0 - 1.53)\times m - fee\\ & = & 1.41 \times 100 - 2\\ & = & 139 \end{array} $$

So, the strategy gains $139.

The following algorithm implements a protective put Option strategy:

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