What is a protective put strategy designed to accomplish?

A protective put strategy is designed to protect an investor against downside risk while still allowing for unlimited upside potential. This strategy involves purchasing a put option for a stock that the investor already owns. The put option gives the investor the right to sell the stock at a predetermined price (the strike price) before the option expires.

By holding the put option, the investor effectively sets a floor for the potential loss on the stock. If the stock price falls below the strike price, the investor can exercise the put option to limit losses. However, if the stock price increases, the investor can benefit from the upside movement without any cap on potential gains, as they still hold the original stock. Thus, this strategy provides a hedge against adverse price movements while allowing the investor to participate in positive price action.

The option that emphasizes downside protection while maintaining the opportunity for significant profit accurately reflects this balance inherent in the protective put strategy.