Protective Put: A strategy that pairs a long stock position with a long put option to cap the downside, functioning as portfolio insurance.

Protective Put

A strategy that pairs a long stock position with a long put option to cap the downside, functioning as portfolio insurance.

Definition

The investor holds the stock and buys a put option, paying a premium for the right to sell the stock at the strike price before expiry. If the stock falls below the strike, the put can be exercised (or sold) to limit the loss to (purchase price - strike price) + premium paid. If the stock rises, the put expires worthless and the investor's gain is reduced by the premium cost. The protective put is conceptually identical to buying insurance: the premium is the cost of the protection; the strike is the deductible floor. It is appropriate for investors who want to maintain their upside exposure to a stock but are unwilling or unable to absorb a large loss (for example, approaching retirement or holding a concentrated position from an employer stock plan). For CIRE: the maximum loss = (stock purchase price - strike price) + premium paid; the break-even at expiry = stock purchase price + premium paid.

Source

Montreal Exchange options education; CIRO IDPC options suitability requirements

Where this shows up on the CIRE

Outcome 5.3

Test yourself

Two real CIRE-bank questions on this exact outcome. Click to reveal the answer and the rule citation.

1
Statistics Canada releases a monthly report showing the Consumer Price Index (CPI) increased by 4.1% year-over-year, above the Bank of Canada's 2% target. Which economic indicator has been reported, and what is its primary significance for investment analysis?
Outcome 5.3 · click for answer
A.The CPI measures the price change of a fixed basket of consumer goods and services; a reading above the Bank of Canada's 2% target signals inflation is running hot, which may prompt a rate hike to cool demand.Correct
B.The CPI is Statistics Canada's unemployment gauge; a 4.1% year-over-year reading indicates the jobless rate has climbed sharply, prompting concern about a weakening labour market and slower consumer spending.
C.The CPI tracks the average growth rate of Canadian corporate earnings; a 4.1% reading indicates strong profit growth, which analysts view as a bullish signal for equity valuations and dividend payouts.
D.The CPI measures Canada's trade balance; a 4.1% reading indicates the country is importing significantly more than it exports, which typically weakens the Canadian dollar against major trading partners.
The Consumer Price Index (CPI) published by Statistics Canada measures changes in the price of a fixed basket of goods and services purchased by Canadian households. It is Canada's primary inflation indicator. The Bank of Canada targets inflation of 2% (within a 1% to 3% control range). A CPI reading of 4.1% year-over-year indicates above-target inflation, which historically leads the Bank to raise its policy rate to cool demand. This has direct implications for fixed income prices, equity valuations, and currency movements.
2
A registrant is explaining economic indicators to a client. The client asks what the Consumer Price Index measures and why it matters for investment decisions. Which response is most accurate?
Outcome 5.3 · click for answer
A.The CPI measures total output of goods and services produced in Canada each quarter
B.The CPI tracks quarterly earnings and profitability of S&P/TSX Composite constituent companies
C.The CPI tracks changes in prices of a fixed household basket and signals inflation trendsCorrect
D.The CPI measures unemployment levels among workers in the manufacturing sector
The Consumer Price Index tracks changes in the average price of a representative basket of goods and services purchased by Canadian households, serving as the primary measure of inflation in Canada. Inflation directly affects investment decisions: it erodes the real return on fixed income securities, influences the Bank of Canada's policy rate decisions, and affects the purchasing power of savings. GDP measures total economic output, unemployment measures labour market conditions, and corporate profitability is tracked through earnings reports; not the CPI.

AI case study

See how Protective Put applies in practice

One named-role scenario with realistic numbers and the rule citation.

Want this kind of explanation on every wrong answer?

The Registrant Prep AI tutor is grounded in the same primary sources cited above. Every wrong practice answer gets the rule that the distractor was testing.

Try the free mock exam See pricing