A protective put means owning shares and buying a put on them. If the price falls below the strike, the put gains value and offsets the loss on the shares. It works like an insurance policy with a deductible.
Example
You own shares at 1,000 and buy the 950 put for 20. Your worst-case value is 950 minus the 20 premium, so you cannot lose more than 70 per share until expiry, however far the stock falls.
The cost of protection
- A strike closer to the current price gives more protection and costs more.
- Longer expiries cost more in total but less per month.
- Buying protection when implied volatility is low is cheaper than buying it in a panic.
Alternatives
To lower the cost, some investors sell a call above the market to pay for the put. This is called a collar. It caps upside as well as downside.
This article is for education only and is not financial advice. Options involve risk and are not suitable for every investor.