Protective Put
An options hedge that buys a put option on an owned stock position to limit downside loss while preserving upside potential.
What is Protective Put?
A protective put is an options strategy in which an investor who holds a long stock position purchases a put option on the same stock to limit potential losses. The put option functions like insurance: if the stock price falls below the put's strike price, the put gains in value, offsetting losses on the stock. The maximum loss is capped at the difference between the stock purchase price and the put strike, plus the premium paid for the put. Upside potential is unlimited, minus the cost of the put premium. A protective put is equivalent in payoff to a long call at the same strike — a relationship formalized by put-call parity. Protective puts are commonly used before high-risk events or by long-term investors seeking to protect paper gains.
Example
An investor bought a stock at $80, which now trades at $120. To protect the gain before earnings, they buy a $115 put for $3.00. If the stock falls to $90 after a bad earnings report, the $115 put is worth at least $25 intrinsically, offsetting most of the $30 stock loss. The investor's net loss is capped at approximately $8 ($120 − $115 + $3 premium) per share rather than $30.