Protective put
Hold stock and buy a put as downside insurance against a drawdown.
The protective put is a hedging strategy that involves buying a put option against shares you already own. It limits your downside risk to a defined level while keeping your full upside participation intact , functioning essentially as insurance on your stock position.
Bias: Bullish (you own the stock) with downside protection Risk profile: Defined downside (strike − put premium), unlimited upside Ideal conditions: You own stock, anticipate potential near-term volatility, want peace of mind
How it's constructed
- Own 100 shares of the underlying stock
- Buy 1 put option at your chosen strike and expiration
- Pay premium for the put , this is your insurance cost
Setup example
You own 100 shares of AAPL bought at $185. Earnings are next week and you're worried about a potential miss. You buy the $175 put expiring in 30 days for $2.50.
- Insurance cost: $250 per contract
- Effective floor: $175 − $2.50 = $172.50
- Max loss on position: $185 − $172.50 = $12.50 per share ($1,250)
- Upside: Unlimited , if AAPL rises, your shares appreciate normally (minus the $250 insurance cost)
Max profit, max loss
| Metric | Value |
|---|---|
| Max loss | Stock purchase price − put strike + premium paid |
| Max profit | Unlimited (stock can rise indefinitely) |
| Floor price | Put strike − premium paid |
When to use a protective put
Best conditions:
- You own a stock with an upcoming binary event (earnings, clinical trial, regulatory decision)
- You're bullish long-term but want short-term downside protection
- You don't want to sell your shares (tax reasons, long-term conviction) but need peace of mind
Cost consideration: The put premium is a real cost , it reduces your net return. In low-IV environments, protective puts are cheap. In high-IV environments (exactly when you most want protection), they're expensive. This is the "insurance paradox" of options , the protection costs most when you most want it.
Protective put vs stop loss
| Protective put | Stop loss | |
|---|---|---|
| Downside protection | Exact floor | Approximate (gaps through) |
| Cost | Premium paid | No direct cost |
| Upside | Fully retained | Fully retained |
| Execution risk | None (option is a right) | Stop can be gapped through |
| Flexibility | Can be sold before expiry | Can be cancelled |
The protective put provides a guaranteed floor that a stop loss cannot , a stop loss order can be gapped through in fast markets, but a put gives you the right to sell at the strike regardless of how far the stock falls.
Related terms: Put option, long put, covered call, premium, delta, IV rank
Try it on Stryke: Screen for put options by strike and expiration to find cost-effective protective puts in the Options Screener.
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