274 Part Ill: Put Option Strategies 
At the opposite end of the spectrum, the stock owner might buy an in-the­
money put as protection. This would quite severely limit his profit potential, since the 
underlying stock would have to rise above the strike and more for him to make a 
profit. However, the in-the-money put provides vast quantities of downside protec­
tion, limiting his loss to a very small amount. 
Example: XYZ is again at 40 and there is an October 45 put selling for 5½. The stock 
owner who purchases the October 45 put would have a maximum risk of½ point, for 
he could always exercise the put to sell stock at 45, giving him a 5-point gain on the 
stock, but he paid 5½ points for the put, thereby giving him an overall maximum loss 
of ½ point. He would have difficulty making any profit during the life of the put, 
however. XYZ would have to rise by more than 5½ points (the cost of the put) for 
him to make any total profit on the position by October expiration. 
The deep in-the-money put purchase is overly conservative and is usually not a 
good strategy. On the other hand, it is not wise to purchase a put that is too deeply 
out-of-the-money as protection. Generally, one should purchase a slightly out-ofthe­
money put as protection. This helps to achieve a balance between the positive feature 
of protection for the common stock and the negative feature of limiting profits. 
The reader may find it interesting to know that he has actually gone through this 
analysis, back in Chapter 3. Glance again at the profit graph for this strategy of using 
the put purchase to protect a common stock holding (Figure 17-1). It has exactly the 
same shape as the profit graph of a simple call purchase. Therefore, the call purchase 
and the long put/long stock strategies are equivalent. Again, by equivalent it is meant 
that they have similar profit potentials. Obviously, the ownership of a call differs sub­
stantially from the ownership of common stock and a put. The stock owner continues 
to maintain his position for an indefinite period of time, while the call holder does not. 
Also, the stockholder is forced to pay substantially more for his position than is the call 
holder, and he also receives dividends whereas the call holder does not. Therefore, 
"equivalent" does not mean exactly the same when comparing call-oriented and put­
oriented strategies, but rather denotes that they have similar profit potentials. 
In Chapter 3, it was determined that the slightly in-the-money call often offers 
the best ratio between risk and reward. When the call is slightly in-the-money, the 
stock is above the striking price. Similarly, the slightly out-of-the-money put often 
offers the best ratio between risk and reward for the common stockholder who is buy­
ing the put for protection. Again, the stock is slightly above the striking price. Actually, 
since the two positions are equivalent, the same conclusions should be arrived at; that 
is why it was stated that the reader has been through this analysis previously.