Protective Put Strategy Analysis

Jane Doe is a portfolio manager at XYZ Investments. She oversees a $500 million portfolio that includes a diverse set of equities and fixed income securities. Recently, she has become concerned about potential market volatility and is considering using options to hedge her portfolio.

Jane believes that the market could experience significant downturns within the next six months due to a combination of geopolitical tensions and economic data that suggests an impending recession. Given this perspective, she is contemplating a protective put strategy on the portfolio.

To implement this strategy, she considers purchasing out-of-the-money put options on the SPDR S&P 500 ETF (SPY) that have a strike price of $400, expiring in six months, which currently trades at $450. She expects to pay a premium of $10 per option. Each option covers 100 shares.

In your response, discuss the rationale behind conducting a protective put strategy, evaluating the potential benefits and drawbacks of this approach. Additionally, analyze how this strategy would perform under different market scenarios, including a market rally, a market downturn, and low volatility conditions. Consider the overall implications for Jane’s portfolio and how this strategy aligns with her investment objectives of capital preservation and risk management.