Protective Put
intermediateBuy downside insurance while keeping unlimited upside. The "married put" — like buying car insurance for your stock portfolio. Pay a small premium, sleep at night.
Parameters
Payoff at Expiry
You own 100 shares at $185. Full upside potential, but also full downside exposure if the stock crashes.
You buy a put at $175 strike for $4.5/share. This gives you the right to sell at $175 no matter how far the stock falls. Your insurance policy.
Your loss is capped at $1450 (100 shares). You keep unlimited upside, but the put premium raises your break-even to $189.50. Like car insurance — you pay a little to sleep well.
How Protective Puts Work
What is it?
A protective put is the simplest hedging strategy: you own 100 shares of a stock, and you buy a put option as insurance. If the stock crashes, the put pays out and limits your loss. If the stock rises, you keep all the upside minus the premium you paid for insurance.
The insurance analogy
| Concept | Car Insurance | Protective Put |
|---|---|---|
| Asset | Your car | Your stock |
| Premium | Monthly payment | Put option premium |
| Deductible | Amount you pay before coverage | Stock price − Put strike |
| Coverage | Covers damage beyond deductible | Covers losses below strike |
Choosing your strike (deductible)
Connection to structured products
A Protection Certificate is essentially a protective put in structured product form. The "protection level" acts as the put strike. Understanding protective puts means you already understand capital-protected products.
When to use
- You hold a large stock position and worry about a pullback
- Ahead of earnings or macro events with uncertain outcome
- You want to stay invested but limit worst-case loss
- You're willing to pay a premium for peace of mind