Protective Put

A protective put combines owning shares with buying a put option on them. The put works like an insurance policy: if the stock falls below the strike, the put gains value and offsets the loss. If the stock rises, you keep the upside, minus the cost of the put. It is sometimes called a married put when the shares and put are bought together. Protective puts suit investors who want to stay invested but limit how much they can lose over a period.

How it works#

1. Own 100 shares per contract.
2. Buy one put at a strike that sets your floor.
3. Pay the premium, the cost of insurance.
4. At expiry: if the stock is below the strike, the put pays the difference (or you can sell your shares at the strike). If above, the put expires and you keep the shares.

Payoff at a glance#

Worked example#

The cost of protection#

Insurance is not free. Buying a 5% out of the money put every quarter might cost 1.5% to 3% each time, or 6% to 12% a year, depending on volatility. Over years, that can consume most of a stock's expected return. Protective puts are best used selectively:

• Around specific risks: earnings, elections, big concentrated positions.
• When implied volatility is low, making puts cheaper. See Implied Volatility (IV).
• For gains you must protect, such as money needed soon.

Index puts are typically pricier than single stock volatility might suggest because of demand for crash protection, a pattern known as skew. See Volatility Smile and Skew.

Choosing a strike#

Like an insurance deductible: the further out of the money, the cheaper the cover and the larger the loss you absorb first.

Reducing the cost#

• Collars: sell a call to pay for the put, giving up upside. See Collars.
• Put spreads: buy a put and sell a lower put, protecting a range of decline. See Bear Put Spread.
• Longer expirations: cost less per month, though more in total.
• Hedge with index puts for a diversified portfolio rather than many single stock puts. See Hedging.

Common mistakes#

• Buying protection after a crash, when puts are most expensive.
• Insuring continuously without counting the long term cost.
• Choosing strikes too far out to protect against realistic declines.
• Letting puts expire without a plan to renew or remove protection.

Frequently asked questions#

What is a protective put?#

Owning shares and buying a put option on them, so that losses below the strike are offset by the put.

How much does a protective put cost?#

It depends on the strike, time to expiry and implied volatility. Out of the money puts for a few months might cost a few percent of the stock price.

Is a protective put the same as a stop loss?#

No. A stop loss can fill well below its level in a gap and sells your shares; a put guarantees the strike price for the option's life and lets you keep the shares.

Next, learn to fund protection by selling upside in Collars.