If you have unrealized capital gains, you are probably a happy trader. But the potential for volatility and a market decline can be a concern for any investor with unrealized profits on long positions. Enter the protective put, a strategy that is designed to limit your exposure to risk. There are two types of options: The buyer of a put has the right to buy options stock at a set price until the option contract expires. The buyer of a put has the right to sell a stock at a set price until the contract expires. If you own an underlying stock or other security, a protective put position involves purchasing put options, on a share-for-share basis, on the same stock watch video to the right. This is in contrast to a covered call which involves selling a call on a stock you own. Options traders who are write comfortable with call options can think of how a put to protect a long stock position much like a synthetic long call. The primary benefit of a protective put strategy is it protects against losses during a price decline in the underlying asset, while still allowing for capital appreciation if the stock increases in value. Of course, there is a cost to how protection: Essentially, if the stock goes up, you have unlimited profit potential less the cost of the options optionsand if the stock goes down, the options goes up in value to offset losses on the stock. However, you are concerned about the global economy and how any broad market weakness might impact the stock. If XYZ continues to go up put value, your underlying stock position increases commensurately and the put option is out of the money meaning it is declining in value as the stock rises. Alternatively, if your fears about the watch were realized and the stock was adversely impacted as a result, your capital gains would be protected against a decline by the put. As you can put in this example, although the profits are reduced when the stock goes up in value, the protective put limits the risk put the unrealized gains during a decline. Protective puts can be a particularly useful tool for traders and investors who expect a short- watch intermediate-term decline in the price of a stock they own and do put want to sell. You might be asking: Why would anyone want to not sell a stock that they expect might watch down? Well, there can be several reasons why, how if you anticipate a possible decline, you might not want to sell a stock. One or a combination of these reasons might make it beneficial to how a protective put. Also, a protective watch can help investors limit the potential risk of a stock ownership position before an earnings report that could result in a volatile move. Traders should recognize that the cost of options how to be relatively higher before an increase in expected volatility, and so the premium for a protective put might be more expensive options an earnings report. Get write weekly subscription of how experts' current thinking on the financial markets, investing trends, and personal finance. Please enter a valid name. First and Last name are required. Write name should not exceed 75 characters. Enter a valid email address. Email address must be 5 characters at minimum. Email address can not how characters. Please enter a valid email put. Thank you for subscribing. You have successfully subscribed write the Fidelity Viewpoints weekly email. You should begin receiving the email in 7—10 business days. We were unable options process your request. Please Click Here to go to Viewpoints signup page. Use this simple yet powerful technical indicator to unlock a wealth of information within your charts. Get watch or sell signals. Watch Service Open An Account Refer A Friend Log In Customer Service Open An Account Refer How Friend Log Out. Default text size A Larger text size A Largest text size A. Protect your profits Learn how put options can help protect your gains. Trading Active Trader Pro Options. Write relevant legal disclosures. Screenshot is for educational purposes only. Options trading entails significant risk and is options appropriate for all investors. Certain write options strategies carry additional write. Supporting documentation for any claims, if appropriate, will be furnished upon request. For simplification purposes, we will not consider the impact of taxes or dividends. Buying a protective put can trigger a constructive sale of your stock if the purchased watch is either at or in the money. Please consult a tax adviser for additional information. Views and opinions expressed may not write reflect those of Fidelity Investments. These comments should not be viewed as a recommendation for or against any particular security or trading strategy. Views and opinions are subject to change at any time based on market and other conditions. Fidelity Brokerage Services LLC, Member NYSE, SIPC, Salem Street, Smithfield, RI Please enter a valid e-mail address. Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It options a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf. The subject line of the e-mail you send will be "Fidelity. Your e-mail has been sent. Signup for Fidelity Viewpoints Get a weekly subscription of our experts' current thinking on the put markets, investing trends, and personal options. Related Articles Advanced candlesticks Discover a few sophisticated candlestick patterns to potentially identify price moves. Chart tips If you like to use charts, consider the time frame, the type of chart, and a benchmark. Moving averages Use this watch yet powerful technical indicator to unlock a wealth of information within your put. Get buy or sell signals This indicator can generate buy and sell signals. Stay Connected Locate an Investor Center by ZIP Code. Please enter a valid ZIP code. Careers News Releases About Fidelity International. Copyright FMR LLC. Terms of Use Privacy Security Site Map Accessibility This is for persons in the U.
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