Protective Put. What is a 'Protective Put'. A protective put is a risk-management strategy that investors can use to guard against the loss of unrealized gains in a stock or other asset.
The maximum loss of a protective put strategy is limited to the cost of buying the underlying stock—along with any commissions—less the strike price of the put option plus the premium and any commissions paid to buy the option. The strike price of the put option acts as a barrier where losses in the underlying stock stop.
Protective puts involve being long a stock and purchasing put options for that stock with a strike price that is near the underlying stock's current price. A protective put is typically used when an investor is still bullish on a stock but wishes to hedge against potential losses and uncertainty.
A protective put acts as an insurance policy by providing downside protection in the event the price of the asset declines. A protective put is a risk-management strategy using options contracts that investors employ to guard against a loss in a stock or other asset.
Protective puts are commonly utilized when an investor is long or purchases shares of stock or other assets that they intend to hold in their portfolio. Typically, an investor who owns stock has the risk of taking a loss on the investment if the stock price declines below the purchase price.
A protective put is a risk-management strategy using options contracts that investors employ to guard against the loss of owning a stock or asset. The hedging strategy involves an investor buying a put option for a fee, called a premium. Puts by themselves are a bearish strategy where the trader believes the price of the asset will decline in ...
Investors use out-of-the-money options to lower the cost of the premium since they are willing to take a certain amount of a loss. Also, the further below the market value the strike is, the less the premium will become. For example, an investor could determine they're unwilling to take losses beyond a 5% decline in the stock.
A put option is a contract that gives the owner the ability to sell a specific amount of the underlying security at a set price before or by a specified date. Unlike futures contracts, the options contract does not obligate the holder to sell the asset and only allows them to sell if they should choose to do so.
Married puts are commonly used when investors want to buy a stock and immediately purchase the put to protect the position.
Many times, a protective put will be at-the-money if it was bought at the same time the underlying asset is purchased. An investor can also buy an out-of-the-money (OTM) put option. Out-of-the-money happens when the strike price is below the price of the stock or asset.