PROTECTIVE PUT
Overview
Own 100 shares and buy a put below the current price to set a floor on losses. You keep all upside above the breakeven while the put caps downside below the strike. Think of it as stock insurance — you pay a known premium for guaranteed protection.
What it does
You're paying for insurance on your stock position. Just like car insurance, you pay a known premium upfront. If nothing bad happens, you lose the premium cost. But if the stock crashes, the put limits your loss to a predetermined level — no matter how far it falls. The combination of stock + put creates the same payoff as a long call.
Structure
buy 100 stock + buy 1 put
Setup
- 1.Own 100 shares of stock.
- 2.Open the option chain and select a put option below the current stock price.
- 3.Buy 1 Put at the price level where you want to cap your losses.
- 4.Choose an expiration that covers the period of risk (earnings, macro event, etc.).
- 5.Your max loss is now fixed — even if the stock crashes, the put pays out below the strike.
Max profit
Theoretically unlimited. Each dollar the stock rises above the breakeven equals $100 profit, reduced by the put premium paid.
Max loss
Defined. (Stock Purchase Price − Put Strike + Premium Paid) × 100.
Breakeven
Stock Purchase Price + Premium Paid.
When to use
When you own a stock and want downside protection for a specific window (e.g., through earnings, lock-up expiry, or a volatile macro period).
When to avoid
As a permanent cost on a routine basis — ongoing put premiums compound significantly and erode long-term returns.
Example trade
Stock: MSFT purchased at $320 Buy 1 MSFT $300 Put at $5.20 (debit $520) Expiration: 60 days Max Loss: ($320 - $300 + $5.20) × 100 = $2,520 Breakeven: $320 + $5.20 = $325.20 Max Profit: Unlimited above $325.20 If MSFT falls to $270: Stock loss = $5,000; Put gain = ($300-$270-$5.20)×100 = $2,480; Net loss = $2,520 If MSFT rises to $350: Stock gain = $3,000; Put expires worthless; Net = $2,480
Common mistakes
- ×Buying protective puts that expire too soon — if the risk window extends beyond the option's life, you're unprotected.
- ×Buying cheap far-OTM puts that don't actually provide meaningful downside protection.
- ×Using protective puts routinely on every stock position — the cumulative cost erodes returns significantly.
- ×Forgetting the put premium raises the effective breakeven — you need a bigger rally to profit.
- ×Not rolling or closing the put when the risk event passes — letting premium decay away unnecessarily.
FAQ
What's the difference between a protective put and a stop-loss?
A stop-loss order can fail in gap-down scenarios — the stock can open well below your stop. A put guarantees the strike as your effective floor, regardless of how the stock opens.
How far below the current price should I buy the put?
It depends on your risk tolerance. ATM puts give maximum protection but cost the most. OTM puts are cheaper but only kick in after a larger decline.
Can I roll the put to a later expiration?
Yes. As the put nears expiration, you can buy another put further out in time, extending your protection at an additional cost.