What a buffer does
A buffer strategy is designed to absorb a defined range of losses before the underlying value affects the position. If the market falls within that range, the position is protected. Below the buffer level, losses can still occur.
Not every buffer eliminates the first losses - the exact structure determines where the buffer begins and how much loss it covers. Parity shows you the specific buffer for the position you build, so you can see exactly what is and is not protected.
Payoff at expiration
Unprotected loss
Below the buffer end, the position takes losses like an unhedged holding.
Buffered range
Between the buffer start and end, losses are absorbed by the option structure.
Upside participation
Above the buffer start, the position participates in gains up to the cap, where the upside levels off.
Key details
- Where the buffer begins: the buffer start is the price level above which the position participates in gains normally.
- How much loss it covers: the distance between the buffer start and end is the range of losses absorbed.
- Below the buffer: losses are not protected. The position behaves like an unhedged holding below the buffer end.
- Upside: may be capped or unlimited depending on whether the structure includes a short call.
- Option cost and expiration: the buffer depends on the option premiums paid and only lasts through the expiration date.
A buffer is not a guarantee against all losses. It absorbs a specific range. Below that range, losses still occur. The outcome is a contractually defined range at expiration, not a guarantee of performance.