Option Fundamentals   • 23
Here an investor is bullish on the prospects of the stock, so he or she doesn’t 
mind accepting exposure to the stock’s downside risk below $50. In return for 
accepting this risk, the option investor receives a premium—let’s say $5. This 
$5 is income to the investor—kind of like a do-it-yourself dividend payment.
By the way, as you will discover later in this book, this is also the risk-
return profile of a covered call.
Buying a Put for Protection
50
100
150
200
-
GREEN
REDGRAY
Above an investor wants to enjoy exposure to the stock’s upside potential 
while limiting his or her losses in case of a market fall. By buying a put 
option struck a few dollars under the market price of the stock, the investor 
cancels out the downside exposure he or she accepted when buying the 
stock. With this protective put overlay in place, any loss on the stock will be 
compensated for through a gain on the put contract. The investor can use 
these gains to buy more of the stock at a lower price or to buy another put 
contract as protection when the first contract expires.
Tailoring Exposure with Puts and Calls
-
20
40
60
80
100
120
140
160
180
200
BE = $60.50
GREEN
RED