The Protective Put Strategy
Protect your stock investments like an insurance policy. Eliminate catastrophic downside risk while keeping unlimited upside potential.
What is a Protective Put?
A Protective Put (also known as a Married Put) is a strategy where you buy a put option for shares you already own. It acts exactly like insurance: you pay a premium to guarantee that you can sell your shares at a specific price, no matter how low the stock drops.
Investors use this strategy when they are bullish on a stock long-term but want short-term protection against volatility or earnings announcements.
Is This Strategy Right for You?
Capital Requirements
Moderate. You need capital to own 100 shares of the stock plus cash to buy the put option.
Options Approval Level
Level 1 or 2. Most basic level. Buying a long put against stock is permitted in almost all accounts, including IRAs.
Best Suited For
- •Long-term investors worried about short-term crashes
- •Protecting profits after a big run-up
- •Trading through binary events like earnings
Pros and Risks
Advantages
- ✓Guaranteed floor: You absolutely know your max loss.
- ✓Unlimited upside: Unlike covered calls, your profits aren't capped.
- ✓Peace of mind: Sleep well knowing your portfolio is insured.
Risks to Consider
- ⚠Cost drag: Buying puts costs money, which raises your breakeven price.
- ⚠Expiration: The insurance expires; if the stock doesn't move, the put expires worthless.
- ⚠Timing: Buying protection when volatility is high (expensive insurance) can hurt returns.
How It Works
Key Terms
Own the Stock
You need to own 100 shares of the stock you want to protect.
Buy a Put Option
Buy a put option with a strike price slightly below the current stock price (ATM or slightly OTM). This strike is your "floor".
Wait for Expiration
If the stock crashes, exercise your put to sell at the strike price. If the stock rallies, your put expires worthless but you profit from the shares.
Worked Example: AAPL at $150
Buying insurance on 100 shares of Apple.
Protective Put Payoff
Position Entry
Stock Price
$150
Buy Put Strike
$145
Put Premium
$3.00
Total Cost
$153.00/share
Stock Rises to $170
Stock Gain
+$20.00
Put Value
-$3.00 (Loss)
Net Profit
+$17.00/share
Stock Crashes to $100
Stock Loss
-$50.00
Put Gain
+$42.00
Net Loss
Only -$8.00
Without the put, you would have lost $50/share. With the put, your loss is capped at $8.
Common Scenarios
Stock Surges
The best case scenario. Your stock gains value significantly.
Action: Let the put expire worthless and enjoy your stock gains. Consider rolling the protection up to lock in profits.
Stock Stagnates
Stock price doesn't move much by expiration.
Action: You lose the premium paid for the put. Decide if you want to buy another put for continued protection tailored to the new timeframe.