The Protective Put, or put hedge, is a hedging strategy where the holder of a security buys a put to guard against a drop in the stock price of that security.
Hold 100 shares; Buy 1 put.
A Protective Put strategy is usually employed when the options trader is still bullish on a stock he already owns but wary of uncertainties in the near term. It is used as a means to protect unrealized gains on shares from a previous purchase.
Unlimited Profit Potential
There is no limit to the maximum profit attainable using this strategy. The Protective Put is also known as a Synthetic Long Call as its risk/reward profile is the same that of a long call's.
Unlimited as the stock price rises.
Limited Risk
Maximum loss for this strategy is limited and is equal to the premium paid for buying the put option.
Stock purchase price plus the put premium paid, minus the put strike price.
Breakeven Point(s)
Stock purchase price plus the put premium paid, provided that price is at or above the put strike.
Example
An options trader owns 100 shares of XYZ stock trading at $50 in June. He implements a Protective Put strategy by purchasing a SEP 50 put option priced at $200 to insure his long stock position against a possible crash.
Max Loss Capped at $200
Maximum loss occurs when the stock price is $50 or lower at expiration. Even if the stock price nosedived to $30 on expiration, his max loss is capped at $200. Let's see how this works out.
At $30, his long stock position will suffer a loss of $2000. However, his SEP 50 put will have an intrinsic value of $2000 and can be sold for that amount. Including the initial $200 paid to buy the put option, his net loss will be $2000 - $2000 + $200 = $200.
Unlimited Profit Potential
There is no limit to the profits attainable should the stock price goes up. Suppose the stock price rallies to $70, his long stock position will gain $2000. Excluding the $200 paid for the Protective Put, his net profit is $1800.
These examples use standard U.S. stock options with a 100-share contract size and matching expiration dates. Related structures can use ETF, index or futures options, but contract multipliers, exercise style, settlement and the underlying price range can differ. A stock’s zero price floor must not be assumed for every futures contract.
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Commissions
For ease of understanding, these examples exclude commissions, fees and financing costs. Include all costs when comparing an actual position; there is no universal commission amount.
For active traders, transaction costs can consume a significant part of returns. Compare the full commission and fee schedule, exercise and assignment charges, and bid-ask spreads. The cost of entering and closing every leg matters.
Similar Strategies
The following strategies offer related market exposure. Compare their construction, cost, maximum loss and assignment obligations; a similar outlook does not mean identical risk.
Before expiration and assignment
The diagrams and worked outcomes describe expiration payoffs, not an option’s market price before expiration. Time decay, implied volatility, rates, dividends and bid-ask spreads affect early closing values. American-style short options can be assigned early; a protective long option is not automatically exercised when a short leg is assigned. Closing or exercising one leg can change the remaining position’s risk.
Amounts are per share before fees. Multiply by the shares covered by the position; standard equity options usually cover 100 shares per contract. If a maximum profit or loss calculation gives a negative amount, use zero. These figures assume matching contracts held to expiration and do not include financing or early assignment.
Compare This Strategy
Optional further reading to help you compare the tradeoffs.
- Protective Put vs Collar — Start with the loss level the investor wants to limit and how long the protection is needed.
