What is a protective put?
In one line: A protective put is buying a put option on a stock you already own. It sets a floor price you can sell at until the option expires.
How it works
You own 100 shares at $50. You buy one Put option with a $45 Strike price, expiring in 2 months. It costs $1.50 per share, so $150.
Now, until expiry, you have the right to sell your shares at $45, however low the stock goes. It works like insurance, and the $150 is the cost of it.
What can happen at expiry
| Stock at expiry | What happens | Result per 100 shares |
|---|---|---|
| $30 | Sell at $45 using the put | −$500 − $150 = −$650 |
| $45 | Put expires worthless | −$500 − $150 = −$650 |
| $50 | Put expires worthless | −$150 |
| $60 | Put expires worthless | +$1,000 − $150 = +$850 |
- Max loss (until expiry): ($50 − $45 + $1.50) × 100 = $650.
- Break-even: $50 + $1.50 = $51.50.
- Upside: open-ended, minus the $150.
A math example, not a promise. Commissions left out. Try other strikes in the options profit calculator.
Why it matters
A stop-loss order can fill far below your price if the stock gaps down overnight. A put doesn't have that problem. It gives you $45 no matter where the stock opens.
That's why it's a classic form of Hedging. It caps the loss for a known cost, for a set time.
A common mistake
Forgetting the cost adds up. $150 every 2 months is $900 a year on a $5,000 position. That's 18%. Protection is not free, and it can eat most of a year's gains.
Also, the floor ends at expiry. After that, you're unprotected unless you buy another put.
Closer strikes protect more but cost more. A $48 put might cost far more than a $45 put. Compare a few on the chain before choosing.
See options trading basics for how puts work.
Questions
What is the max loss on a protective put?
The stock price minus the strike, plus what you paid for the put, times 100. Here, $650, until the put expires.
Is a protective put the same as a stop-loss?
Both limit losses. A put guarantees the strike price even after a gap, but it costs money up front and runs out.
Do I have to exercise the put?
No. You can sell the put instead. If the stock fell, the put has gained value, which offsets the loss on the shares.
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