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Protective Put

Own shares and buy a put. Like insurance: it sets a floor under your position.

New to this? A protective put works like insurance. You own the shares and buy a put, which gives you the right to sell them at the strike no matter how far the price falls. Unfamiliar word? See the options glossary.

Payoff at expiration

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When traders use it

You want to keep a stock but limit downside (e.g., through an event).

Formulas (per share; ×100 per contract)

Max profit	Unlimited
Max loss	(S − K) + P
Breakeven	S + P

Key risks

The premium is a recurring cost that drags returns; protection expires.

How it works

Own 100 shares and buy one put. The put gives you the right to sell at the strike, so your worst case is fixed: (purchase price − strike) + premium. Upside is unlimited, minus the premium cost.

Worked example HYPOTHETICAL

Hypothetical example only — not real prices or a recommendation. Own 100 shares at $100. Buy 1 put, 60 days, $95 strike, for $2.00 ($200).

Stock price at expiration	P/L (1 contract, excl. fees)
$70	−$700
$90	−$700
$95	−$700
$100	−$200
$102	$0
$120	+$1,800

Market outlook: when to use it

Use when: Bullish long term but worried about a near-term drop; protecting gains through an event.

Avoid when: When protection is very expensive (high IV) or as a permanent hedge — repeated premiums drag returns.

The Greeks, in plain words

Delta	Positive, less than 100 shares.
Theta	Negative: the put decays.
Vega	Positive: put gains when volatility spikes.
Gamma	Positive.

Choosing strikes and expiration

Closer strikes = more protection, higher cost. 5–10% OTM and 2–6 months is common. Longer puts cost less per day.

Managing the trade

Sell the put after a drop to capture value, or roll down/out. Long puts are not assigned. Consider a collar to reduce cost.

Common mistakes

Buying short-dated puts repeatedly (high decay).
Buying after the drop when IV is high.

FAQ

Max loss?
($100 − $95) + $2 = $7/share ($700).

Breakeven?
$102.

Explained simply

When would someone use this?

When you own a stock and want to limit how much you can lose over a period of time, while keeping the upside.

The setup, in plain words

Own 100 shares and buy one put, usually below the current price. The put sets a floor; the premium is the cost of the insurance.

Max profit, max loss and breakeven

Max profit: Unlimited in theory, minus the premium paid.
Max loss: (Purchase price − put strike + premium) × 100.
Breakeven: Stock purchase price + premium paid.

A simple numeric example (hypothetical)

You own 100 shares at $100 and buy a $95 put for $2.00 ($200). If the stock falls to $70, you can sell at $95, so the loss is $500 on the shares plus $200 for the put = $700. If the stock rises to $120, you gain $2,000 minus $200 = $1,800.

The main risks, in plain words