Protective Put
In short
Buying a put on a stock you own — insurance against a crash
Like buying insurance on your car. You own 100 Apple shares and buy a put at $150. If Apple crashes to $100, your put lets you sell at $150. You paid a premium for this safety net.
Protective puts (married puts) create a floor on potential losses. The cost is the put premium, which reduces your net return. The position creates a synthetic call — unlimited upside with capped downside. Especially valuable before earnings or in uncertain markets.
Formula
Max Loss = Stock Purchase Price - Strike Price + Premium PaidRelated concepts
- Put Option — A put option is like insurance for your stocks. If you own shares and buy a put, you can sell them at the strike price even if the stock crashes. You pay a premium for this protection.
- Covered Call — You own 100 shares of Apple and sell someone the right to buy them at $200. They pay you $5 per share ($500). If Apple stays below $200, you keep the $500. If it rises above $200, you sell your shares at that price.
- Delta — If a call has delta of 0.5, it gains $0.50 for every $1 the stock rises. Delta 1.0 means the option moves dollar-for-dollar with the stock. At-the-money options typically have delta near 0.5.
- Collar — A collar buys a put for protection and sells a call to pay for it. Your gains are capped at the call strike but losses are protected below the put strike. It's a low-cost hedge that sacrifices upside to prevent downside.