Downside Protection

AAA

DEFINITION of 'Downside Protection'

The use of an option or other hedging instrument in order to limit or reduce losses in the case of a decline in the value of the underlying security. Downside protection often involves the purchase of an option to hedge a long position. Other methods of downside protection include using stop losses or purchasing assets that are negatively correlated to the asset you are trying to hedge.

INVESTOPEDIA EXPLAINS 'Downside Protection'

An example of downside protection would be the purchase of a put option for a particular stock. If an investor already owns shares and the price of that stock falls, the value of the option will increase and thus limit the total loss exposure.

RELATED TERMS
  1. Natural Hedge

    A method of reducing financial risk by investing in two different ...
  2. Covered Call

    An options strategy whereby an investor holds a long position ...
  3. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  4. Long (or Long Position)

    1. The buying of a security such as a stock, commodity or currency, ...
  5. Put Option

    An option contract giving the owner the right, but not the obligation, ...
  6. Absolute Percentage Growth

    An increase in the value of an asset or account expressed in ...
Related Articles
  1. Covered Call Strategies For A Falling ...
    Investing Basics

    Covered Call Strategies For A Falling ...

  2. Cut Down Option Risk With Covered Calls
    Options & Futures

    Cut Down Option Risk With Covered Calls

  3. The Basics Of Covered Calls
    Options & Futures

    The Basics Of Covered Calls

  4. Going Long On Calls
    Options & Futures

    Going Long On Calls

comments powered by Disqus
Hot Definitions
  1. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  2. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  3. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  4. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  5. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
  6. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
Trading Center