How does a protective put work?
You hold 100 shares and buy one put on the same stock; a standard US equity option covers 100 shares. If the stock falls below the strike, the put gains value and offsets the loss on the shares, so your loss stops at the strike, plus the premium you paid. If the stock rises, the put expires worthless and you keep the gain, minus the premium.
Think of it as insurance with a deductible. The premium is the price of the policy; the distance from your purchase price down to the strike is the deductible you still carry. Put basics are in call vs put, and other combinations in options strategies.
- Protective put
- Long shares plus one long put per 100 shares on the same stock. It caps the loss below the strike for the life of the put.
- Floor
- The lowest value your position can reach before expiration: the strike, minus the premium paid.
Protective put example: max loss, breakeven and cost
Hypothetical: you buy 100 shares at $50 and a 90-day put with a $45 strike for $1.00, or $100.
At expiration, at $35 the shares lose $1,500 and the put is worth $1,000, so you are down $600 after the premium. At $45 the put expires worthless: −$500 on the shares and −$100 premium, again −$600. At $60 you gain $1,000 on the shares minus $100, +$900. Without the put, the $35 case would have cost $1,500. The formulas, per share and then times 100:
- Max loss = stock cost − strike + premium = 50 − 45 + 1 = $6, or $600, anywhere below $45
- Breakeven = stock cost + premium = $51
- Upside: unlimited, minus the $1.00 premium
- Cost of protection: $1.00 on a $50 stock, 2% for 90 days
How to choose the strike and expiration
The strike sets the floor and the premium sets the price. A put at the money costs the most and leaves almost no deductible; a lower strike is cheaper but lets you lose more before the protection starts. The drawing compares three 90-day puts on the same $50 stock (hypothetical prices): the $50 strike for $3.00, max loss $3.00 a share; $47.50 for $1.80, max loss $4.30; $45 for $1.00, max loss $6.00.
A longer expiration costs more in total but less per month, because time value decays fastest in the last weeks; see theta in options Greeks. Premiums also rise with implied volatility, so protection bought after a sharp drop or just before earnings is expensive. Strike choice in general is covered in how to choose a strike price.
Mind the running cost: 2% every 90 days is about 8% a year if you keep renewing, enough to swallow much of a stock’s return. That is why many investors buy puts around specific risks rather than all the time.
Protective put vs stop-loss: what happens in a gap?
A stop-loss order costs nothing until it triggers, but it is not a price floor. Once triggered it becomes a market order, so if the stock opens far below your stop after bad news, you are filled near the open. A put has no such gap risk: until expiration you can sell at the strike, whatever the opening price.
Hypothetical: the stock closes at $50 and opens at $40 after overnight news. A stop at $45 fills near $40, a loss of about $10 a share. With the $45 put, you lose $5 a share down to the strike plus the $1 premium: $6. In exchange, the put costs money every time and expires, while the stop is free and stays until you cancel it.
Many traders combine the two: a stop for normal days, a put through known events. More in stop-loss and take-profit and the gap trading strategy guide.
The collar: cheaper protection with a capped upside
A collar adds one leg: you sell a covered call above the price to pay for the put. Hypothetical: with the stock at $50, buy the 90-day $45 put for $1.00 and sell the 90-day $55 call for $1.20, a net credit of $0.20. Your loss is capped at $4.80 a share and your gain at $5.20. The protection costs nothing up front, but you give up any rise above $55, and the shares can be called away at that strike.