Can a path-dependent strategy outperform a path-independent strategy?

•This paper demonstrates how a cost-down device, a ratcheted contingent upward principle in a dynamic protective put strategy in which knock-in put options are applied, can be embedded into the upward movements of the strike price.•We found that certain benefits (i.e., better risk and loss averse performance measures) can be obtained by increasing the strike prices in a protective put while also reducing the costs.•Our results show that a path-dependent strategy outperforms a path-independent strategy in terms of higher Sharpe and Sortino ratios (risk and loss adjustment performance measures).

The question of whether a path-independent strategy can outperform a path-dependent one has given rise to an interesting debate within the finance literature. This paper uses a protective put as an example and shows that by embedding a cost-down method into our approach, a path-dependent strategy may well outperform a path-independent one. The simulation results illustrate that our proposed protective put outperforms a classical protective put, exhibiting superior capabilities in terms of capturing upside potential, leading to higher Sharpe ratios and Sortino ratios, and avoiding insolvency. The results obtained from our sensitivity analysis provide further confirmation of the robustness of our simulation findings.