Downside Protection


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.

BREAKING DOWN '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.

  1. Natural Hedge

    A method of reducing financial risk by investing in two different ...
  2. Put Option

    An option contract giving the owner the right, but not the obligation, ...
  3. Covered Call

    An options strategy whereby an investor holds a long position ...
  4. Long (or Long Position)

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

    Making an investment to reduce the risk of adverse price movements ...
  6. Put-Call Parity

    A principle that defines the relationship between the price of ...
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