What portfolio risk management objective is achieved by implementing a 'Protective Put' strategy?

[ A ]Eliminating all capital gains taxes on long-term equity holdings.

[ B ]Guaranteeing a fixed 15% dividend yield from the stock exchange.

[ C ]Capping upside returns while taking unlimited downside loss exposure.

[ D ]Establishing a guaranteed price floor against severe downside portfolio losses while retaining unlimited upside potential from stock price appreciation.[ CORRECT ]

Takeaway

A Protective Put establishes a guaranteed price floor against severe downside losses on a held stock, while leaving unlimited upside potential intact if the stock appreciates.

Derivation

By buying a put option on shares already owned, the investor locks in a minimum effective sale price (the strike price, less the premium paid) no matter how far the stock falls, functioning exactly like an insurance policy against a market crash. If the stock instead rises, the put simply expires worthless (costing only the premium paid), and the investor fully participates in the stock's appreciation with no cap — unlike a covered call, which caps the upside in exchange for premium income, a protective put costs money upfront but preserves the full upside. This asymmetric insurance-like payoff (capped downside, uncapped upside, at the cost of a premium) is the specific risk-management logic the exam is testing.

Why the others fail

A — Eliminating all capital gains taxes on long-term equity holdings.

Options strategies have no mechanism to eliminate capital gains tax liability; tax treatment on equity holdings is governed by the Income Tax Act, independent of any options overlay applied.

B — Guaranteeing a fixed 15% dividend yield from the stock exchange.

A protective put provides downside price protection, not a guaranteed dividend yield — dividend payments are declared at the discretion of the company's board, unrelated to holding a put option.

C — Capping upside returns while taking unlimited downside loss exposure.

This describes the opposite risk profile of a protective put, which caps downside loss (via the put's floor) while preserving unlimited upside.