A protective put is insurance for a stock you own. You buy a put under your shares, and if the stock falls below the strike, the put gains value and covers the loss from there down. If the stock rises, you keep the upside, minus what the insurance cost. It’s also called a “married put” when you buy the shares and the put together.
How it works
- You own 100 shares.
- You buy one put, usually a little below the current price.
- Below the put’s strike, every dollar the stock loses, the put gains.
- Above it, you’re simply long the stock, minus the premium you paid.
Max profit, max loss and break-even
| Protective put | |
|---|---|
| Max profit | Unlimited, minus the premium |
| Max loss | (Your share price − put strike) + premium |
| Break-even | Your share price + premium |
Worked example
You own 100 shares of Apple ($AAPL) at $150 and you’re worried about a correction. You buy a six-month $140 put for $4 a share ($400).
- AAPL drops to $120: the stock is down $3,000, but the put is worth $20 a share ($2,000). Your net loss is $1,000 plus the $400 premium, $1,400. That’s the worst it can get, even if Apple fell to zero.
- AAPL stays at $150: the put expires worthless and you’re out the $400.
- AAPL rises to $180: you make $3,000 on the shares, minus the $400, so $2,600.
In other words, you pay $400 to know your loss can never exceed $1,400, however bad things get.
Another one: 100 shares of Tesla ($TSLA) at $250, with a three-month $240 put for $5 ($500). If Tesla drops to $200, the shares lose $5,000 and the put gains $4,000, so you’re down $1,500 including the premium, instead of $5,000.
When it makes sense
- You have a big gain in a stock and want to protect it without selling, which could also mean paying tax on the gain.
- You’re nervous about a specific event, like earnings or a Fed meeting.
- You’re bullish long term but want a floor under a position for a while.
What to watch out for
- The cost. Insurance isn’t cheap, and if you buy it every month, it eats a real chunk of your returns.
- Time decay. The put loses value as expiration approaches if nothing happens.
- Paying for nothing. Most of the time the stock doesn’t crash, and the put expires worthless. That’s what insurance is, but it adds up.
Tips
- Choose how much loss you can live with. A strike 5–10% below the current price is common. Closer strikes protect more and cost more.
- Longer puts are cheaper per month. A six-month put usually costs less per month than six one-month puts.
- If the cost is too high, consider a collar, which sells a call to pay for the put.
There’s a longer walkthrough in protective puts explained, and a comparison in protective put vs collar.