Understanding Protective Puts as Risk Management Tools

Michael is a portfolio manager for a large asset management firm. He oversees a diversified portfolio composed of equities, fixed income, and alternative investments. Recently, the firm has experienced increased volatility in the markets, prompting Michael to consider using derivatives to manage risk in a more effective manner.

Michael is particularly interested in using options to protect the portfolio from potential downturns in equity markets. He contemplates implementing a protective put strategy on the equity portion of the portfolio.

The protective put strategy involves buying put options on the stocks held in the portfolio.

Which of the following statements best describes a key benefit of using protective puts in Michael's portfolio management strategy?