Protective Put
Owning shares and buying a put to establish a potential downside floor for a limited period.
What is a Protective Put?
Owning shares and buying a put to establish a potential downside floor for a limited period.
Construction
Own shares and buy a put covering the same number of shares.
When it may be studied
To study temporary downside protection while retaining upside participation.
Expiration profile
Maximum risk: Stock decline to put strike plus put premium and basis considerations
Maximum reward: Stock upside minus put cost
Break-even: Stock cost plus put premium, simplified
Worked example
Own shares at $100 and buy a 95 put for $3. The put can gain intrinsic value below $95, establishing a simplified floor near $92 after premium.
Key risks and limitations
Protection expires and has a cost. The hedge may reduce returns and can be affected by basis, taxes, liquidity, and exercise decisions.
Entry and exit checklist
- Confirm contract multiplier, expiration, exercise style, settlement, and liquidity.
- Calculate the maximum loss under the intended structure.
- Review earnings, dividends, corporate actions, and other event risks.
- Define an exit, adjustment, or expiration plan before entry.
- Understand what happens if one leg is assigned or exercised early.