Index XYZ is between the strike price of 96 and break-even point at expiration
XYZ Index at 100
Buy 200 XYZ 96 Puts at $0.75
The investor’s portfolio had a value of $2 million when it was insured with the 200 protective puts, when the level of index XYZ was 100. The upside break-even point for this position would be a portfolio value equal to its value when insured, or $2 million, plus the $15,000 cost of the puts, or a total of $2,015,000. As long as the portfolio exactly tracks the performance of index XYZ, the break-even point would be reached with an increase in XYZ of 0.75% to 100.75. The expected increase in portfolio value of the same 0.75% would be $15,000, or an amount that would exactly cover the original cost of the puts.
If at expiration index XYZ closes at any point between 96, the put strike price, and the break-even point of 100.75, the investor would incur a partial loss on the position. Say XYZ closes down 1% at a level of 99, and the protective puts expire out-of-the-money and with no value. With this decline of 1% in XYZ the investor’s portfolio could be expected to see a corresponding 1% loss of $20,000, less than the maximum. Added to this loss would be the $15,000 premium paid for the puts.