NISM Certifications · NISM-Series-VIII: Equity Derivatives · Sales Practices and Investors Protection Services
Mr. Rao holds shares of Rs 10 lakh and buys a protective put. Which statement best describes the main benefit of this strategy to be explained to him?
A protective put limits the downside on the held shares while retaining upside gains, but the investor pays a premium for this insurance. It does not eliminate all risk or come free of cost.
- AIt limits downside loss while keeping upside potential, at the cost of the premiumCorrect
- BIt gives unlimited profit with no cost
- CIt removes all risk including the premium paid
- DIt earns premium income with unlimited downside
Explanation
A protective put sets a floor on losses at the strike less premium, while upside remains open. The premium is a cost. Premium income with unlimited downside describes writing options.
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