Put Buying in Conjunction 
with Com.m.on Stock 
Ownership 
Another useful feature of put options, in addition to their speculative leverage in a 
downward move by the underlying stock, is that the put purchase can be used to limit 
downside loss in a stock that is owned. When one simultaneously owns both the com­
mon stock and a put on that same stock, he has a position with limited downside risk 
during the life of the put. This position is also called a synthetic long call, because the 
profit graph is the same shape as a long call's. 
Example: An investor owns XYZ stock, which is at 52, and purchases an XYZ October 
50 put for 2. The put gives him the right to sell XYZ at 50, so the most that the stock­
holder can lose on his stock is 2 points. Since he pays 2 points for the put protection, his 
maximum potential loss until October expiration is 4 points, no matter how far XYZ 
might decline up until that time. If, on the other hand, the price of the stock should 
move up by October, the investor would realize any gain in the stock, less the 2 points 
that he paid for the put protection. The put functions much like an insurance policy with 
a finite life. Table 17-1 and Figure 17-1 depict the results at October expiration for this 
position: buying the October 50 put for 2 points to protect a holding in XYZ common 
stock, which is selling at 52. The dashed line on the graph represents the profit poten­
tial of the common stock ownership by itself. Notice that if the stock were below 48 in 
October, the common stock owner would have been better off buying the put. However, 
with XYZ above 48 at expiration, the put purchase was a burden that cost a small por­
tion of potential profits. This strategy, however, is not necessarily geared to maximizing 
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