Option strategies
The protective put
3 min
A protective put is owning 100 shares and buying one put against them. It is portfolio insurance: it caps your downside while leaving your upside intact.
The structure
Own 100 shares at 100
Buy 1 put, strike 95, pay premium 2.00
The payoff
- Stock falls to 80: without protection you would lose 20. With the put you can sell at 95, so your loss is capped at 5 of stock + 2 premium = 7 maximum loss, no matter how far the stock drops.
- Stock rises to 120: the put expires worthless (you lose the 2 premium) but your shares gained 20. Net +18 — your upside is fully intact, minus the cost of insurance.
When to use it
Use it when you want to stay invested but protect against a specific risk — an earnings report, a macro event — without selling your shares and triggering taxes or missing a rally.
Honest cost
Insurance is not free. The premium is a guaranteed drag on returns; buy puts repeatedly and the cost compounds. The put also has theta and vega — buy it when implied volatility is already high (e.g. mid-panic) and you overpay badly. Protective puts are best bought before trouble is obvious, when they are cheap, not after fear has already inflated them.
This content is for educational and informational purposes only and is not investment, financial, tax or legal advice. Trading and investing carry risk, including the possible loss of capital. Any performance shown by third-party tools is hypothetical and not a promise of future results. Do your own research and consider professional advice before making any decision.