Protective Put: How It Works, Example and Risks
A protective put buys a put on shares you own to set a floor under losses. Traders use it as insurance through uncertain periods. The main cost is the premium, which reduces returns if the stock doesn't fall.
At a glance
| Outlook | bullish |
|---|---|
| Level | beginner |
| Max profit | Unlimited (stock upside minus premium) |
| Max loss | (Stock price − strike + premium) × 100 |
| Breakeven | Stock price + premium |
| Greeks exposure | Positive delta, negative theta, positive vega |
| Ideal IV environment | Low IV |
Payoff diagram
Worked example
Own 100 shares at $100 and buy the $95 put for $2.00. Max loss is ($100 − $95 + $2) × 100 = $700, no matter how far the stock falls. Breakeven is $102.
How to manage it
- Match expiration to the period you want covered.
- Use a collar to offset the cost.
- Roll the put down after a rally to lock in gains.
Risks
- Premium is lost if the stock doesn't fall.
- Ongoing cost if repeated.
- Protection ends at expiration.
Questions
Is a protective put like insurance?
Yes — the premium is the cost and the strike is the deductible floor.
How much does protection cost?
It depends on strike, time and IV; closer strikes and longer dates cost more.
Can I sell the put later?
Yes, you can close it any time before expiration.
Related
Last updated: