Final answer:
The cheapest out-of-the-money put in a protective put strategy will protect the stock owner from extreme loss on the stock.
Step-by-step explanation:
In a protective put strategy, the cheapest out-of-the-money put will protect the stock owner from extreme loss on the stock.
A protective put strategy involves buying a put option for the same number of shares owned. This put option gives the stock owner the right to sell the stock at a predetermined strike price. If the stock price falls below the strike price, the put option can be exercised, limiting the stock owner's loss to the difference between the strike price and the stock price.
The cheapest out-of-the-money put refers to a put option that has a strike price below the current stock price and is the most affordable among all available put options. This put option provides protection against extreme loss on the stock, as it allows the stock owner to sell the stock at a higher price in case of a significant decline in the stock price.