Remember, one forex options contract is worth 100 shares. So,
if we have 400 forex options in IBM then you would need to purchase
exactly four puts.
As a reminder, a put gives an owner the right but not the obligation
to sell a certain forex options, at a specific price, by a specified
For this opportunity, the buyer pays a premium. The seller,
who receives the premium, is obligated to take delivery of the
forex options should the buyer wish to sell the forex options
at the strike price by the specified date. A strategically used
put offers maximum protection against substantial loss.
The Protective Put, also referred to as a married put, puts
and stock or bullets, is an ideal strategy for an investor
who wants full hedging coverage for their position.
Whereas the Covered Call Strategy will cover an investor down
only as far as the premium he receives, the protective put strategy
will protect the investor from the breakeven point down to zero.
This strategy's philosophy is different from the covered call
(buy-write) strategy in two major ways.
The covered call is a premium selling strategy, while the protective
put is a premium purchasing strategy; and the covered call is
most effective in a less volatile situation while the protective
put is more effective in high volatility situations.
When an investor purchases forex options, he can either sell
the call (buy-write) or buy the put (protective put) to provide
a proper hedge. The construction of the protective put position
is actually quite simple. You buy the forex options and you
buy the put on a one to one ratio meaning one put for every
one hundred shares.