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. The put option acts like an insurance policy — it costs money, which reduces the investor's potential gains from owning the security but also reduces his risk of losing money if the security declines in value. A protective put is also known as a married put.

BREAKING DOWN 'Protective Put'

Implementing a protective put involves being long the underlying stock and purchasing a put option 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.

Profit and Loss

The maximum profit of a protective put is theoretically unlimited as the strategy involves being long on the underlying stock. The maximum loss is limited to the purchase price of the underlying stock less the strike price of the put option and the premium paid. The strike price of the put option acts as a barrier that the stock's price cannot fall below. The ideal situation in a protective put is for the stock price to increase, as the investor would benefit from the long stock position. The breakeven point of a protective put at the expiration state is equivalent to the current price of the underlying stock plus the premium paid for the put option.

Protective Put Example

If an investor purchased 100 shares of stock XYZ at $10 per share, and the price increased to $20 but he has not sold it, he has unrealized gains of $10. If he doesn't want to sell the stock yet (perhaps because he thinks it will appreciate further) but he wants to make sure he doesn't lose the $10 in unrealized gains, he can purchase a put option for that same stock (called the "underlying stock") that will protect him for as long as the option contract is in force. If the stock continues to increase in price, say, going up to $30, the investor can benefit from the increase. If the stock declines from $20 to $15 or even to $1, the investor is able to limit his losses because of the protective put.

Assume the investor purchased a put option on stock XYZ with a strike price of $15 for 75 cents. Therefore, the investor's maximum loss is limited to $575, or 100 x ($10 - $15 - $0.75), rather than $1,000 if he did not purchase the put option.

RELATED TERMS
  1. Long Put

    An options strategy in which a put option is purchased as a speculative ...
  2. Married Put

    An option strategy whereby an investor, holding a long position ...
  3. Short Put

    A type of strategy regarding a put option, which is a contract ...
  4. Bull Put Spread

    A type of options strategy that is used when the investor expects ...
  5. Bear Spread

    1. An option strategy seeking maximum profit when the price of ...
  6. Put On A Put

    One of the four types of compound options, this is a put option ...
Related Articles
  1. Trading

    Bear Put Spreads: A Roaring Alternative To Short Selling

    This strategy allows you to stop chasing losses when you're feeling bearish.
  2. Trading

    Solving Mixed Options Problems On The Series 7

    Learn to ace the questions that involve both options contracts and stock positions.
  3. Trading

    Profiting From Stock Declines: Bear Put Spread Vs. Long Put

    If you're bearish, you should compare the risk/reward characteristics of these two strategies.
  4. Investing

    Insure Your ETF Investments With Options

    Learn how to insure and hedge against unfavorable moves in ETF investments using options strategies, such as the protective put and the protective collar.
  5. Managing Wealth

    Practical And Affordable Hedging Strategies

    Learn how to find and use the most cost-effective ways to transfer risk.
  6. Trading

    Three Ways to Profit Using Put Options

    A brief overview of how to profit from using put options in your portfolio.
  7. Trading

    Introduction To Put Writing

    Learn about a strategy that may be appropriate if you have a positive outlook on a stock.
  8. Trading

    Prices Plunging? Buy A Put!

    Investors can make money on a falling stock by going long on a put.
  9. Trading

    A Guide Of Option Trading Strategies For Beginners

    Options offer alternative strategies for investors to profit from trading underlying securities, provided the beginner understands the pros and cons.
  10. Trading

    Manage Risk With Trailing Stops And Protective Put Options

    Using the right strategy can lower the risk of failure and protect your profits.
RELATED FAQS
  1. How do traders combine a short put with other positions to hedge?

    Learn how sold puts can be utilized in different types of hedging strategies, and understand some of the more common option ... Read Answer >>
  2. When is a put option considered to be "in the money"?

    Learn about put options, what they are, how these financial derivatives operate and when put options are considered to be ... Read Answer >>
  3. Can I make money using put options when prices are going up?

    It seems counterintuitive that you would be able to profit from an increase in the price of an underlying asset by using ... Read Answer >>
  4. What techniques are most useful for hedging exposure to the telecommunications sector?

    Learn about option strategies used to hedge a long stock position in the telecommunications sector, including bear put spreads ... Read Answer >>
  5. Why are call and put options considered risky?

    Learn why put and call options are considered risky and see how, depending on which side of the contract you are on, you ... Read Answer >>
  6. What's an effective options strategies for investing in the food and beverage sector?

    Discover two options strategies that are well-suited for investors in the food and beverage sector that can be used to increase ... Read Answer >>
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center