What is a protective put?

A protective put is buying a put option on shares you already own. The put gains value if the stock falls, offsetting losses on the shares.

When does a protective put make sense?

Before earnings, before major news, when you want to hold long term but worry about a short term drop. Insurance you pay for in advance.

How much does a protective put cost?

It depends on the strike, the time to expiration and implied volatility. Closer to the current price costs more, and so does higher volatility.

ZenEdge / Options Strategy

Protective Put: Insurance For Shares You Own

By chartmaster3000, founder of ZenEdge

A protective put is a long put bought against shares you already hold. The shares are the asset. The put is the insurance policy. If the stock drops, the put pays you back for some of the loss.

That is all it does. No clever structure. No legs to manage. One put per hundred shares.

When One Makes Sense

Before earnings on a name you want to keep holding. Before a Fed meeting with size on. Before any binary event where the stock could open down ten percent. The put cost is the premium for sleeping through the night.

Puts on the entire portfolio every day are expensive insurance. That eats returns. They earn their cost when the risk is concentrated in a known event window.

Insurance math. A put that costs $200 to protect $10,000 of stock is two percent. If the stock drops fifteen percent and the put recovers ten of that, you saved $800 net of the $200 premium. If the stock does not drop, you spent $200 and your shares are still yours.

Strike Selection

At the money put: maximum protection, highest cost. Use before known binary events.
Five percent out of the money: covers a serious drop, costs less.
Ten percent out of the money: catastrophe insurance only. Cheapest premium.

Slightly out of the money is a common strike. That accepts the first part of a move. The protection is for a real break.

Expiration Selection

Match the expiration to the event window. Earnings is next Thursday: buy the weekly that covers Thursday. Holding through a Fed meeting two weeks out: buy the put dated for that week.

Do not buy six month puts to cover a one week event. You are paying for time you do not need.

What Can Go Wrong

The stock does not drop. The put expires worthless. You paid the premium and got nothing back. This will happen most of the time.

That is the point. Insurance you collect on every month is a bad sign. It means something is wrong. A protective put is a small drag in exchange for peace of mind through known events.

chartmaster3000 take. If you cannot afford to lose what the put would have saved you, you have too much in one stock. Position size first. Insurance second. The put is not a substitute for proper sizing.

chartmaster3000

Your Hedge Rules, In Your Words

If you buy puts to protect shares, the ZenEdge Audit writes down how you said you use them.

See the Audit

chartmaster3000 is not a registered investment advisor, broker dealer, financial planner, or fiduciary. Nothing on this page constitutes investment advice or a recommendation to buy, sell, or hold any security. You are solely responsible for your own trading decisions, position sizing, risk management, and outcomes. Trading involves risk of loss, including total loss of capital.