Glossary
Protective put
Buying a put option on a stock you own so that losses below the strike price are capped, in exchange for the premium paid.
On this page
A protective put is an options strategy in which you own a stock and buy a Put option on the same stock. The put gives you the right to sell your shares at the strike price until expiration, so it sets a floor under your losses while leaving the upside open. The cost is the premium, which works like an insurance payment: if the stock never falls, the money is spent.
How it works
One standard equity option covers 100 shares, so a protective put pairs 100 shares with one put contract. The strike chosen decides how much protection you get and what you pay: a strike near the current price protects more and costs more; a lower strike acts like a higher deductible.
Trade-offs to understand
- Cost adds up. Rolling three-month puts every quarter at 3% each costs about 12% a year, a heavy drag in a rising market.
- Volatility pricing. Puts are most expensive when fear is high, often right when investors want them. See Implied volatility.
- Timing. Protection ends at expiration. A drop the week after the put expires is not covered.
- Alternatives. A Stop-loss order costs nothing up front but can fill far below its trigger in a gap; a collar finances the put by selling a covered call, giving up upside above the call strike.