Protective put
How does buying a put option set a floor on losses for someone who owns an asset?
In plain words
A protective put is an option that gives its holder the right to sell an asset at a chosen price, the strike. If the market falls below that price, the option pays, offsetting the loss on the asset itself. The premium paid for the option is the cost of that protection.
Why it matters
It converts an open-ended loss into a bounded one: below the strike, further falls stop hurting the holder. The trade-off is the premium, which is spent whether or not the protection is used, and which is not visible in spot price data.
In a real week: ETH, week of 3 January 2022
In the week of 3 January 2022, ETH opened at 3828.11, fell to a low of 3000.0 on Saturday, and closed at 3151.97, a weekly return of -17.66%. A put struck near the week's open would have gained value as the price fell. The data here shows no option prices, so the size of that gain cannot be measured.
A common mistake
Assuming protection is free. The option premium is paid up front regardless of whether the floor is ever reached, and it can erode returns in weeks when the market rises.