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. The put option acts like an insurance policy - it costs money, which reduces the investor's potential gains from owning the security, but it also reduces his risk of losing money if the security declines in value.

BREAKING DOWN 'Protective Put'

If an investor purchased a stock for $10 that is now worth $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.

RELATED TERMS
  1. Unrealized Gain

    A profit that exists on paper, resulting from any type of investment. ...
  2. Unrealized Loss

    A loss that results from holding onto an asset after it has decreased ...
  3. Short Put

    A type of strategy regarding a put option, which is a contract ...
  4. Realized Gain

    A gain resulting from selling an asset at a price higher than ...
  5. Married Put

    An option strategy whereby an investor, holding a long position ...
  6. Accumulated Other Comprehensive ...

    Expenses, gains, and losses reported in the stockholder’s equity ...
Related Articles
  1. Managing Wealth

    Explaining Unrealized Gain

    An unrealized gain occurs when the current price of a security exceeds the price an investor paid for the security.
  2. Investing

    What Are Unrealized Gains And Losses?

    Gains or losses become “realized” when the stock is sold.
  3. Trading

    Solving Mixed Options Problems On The Series 7

    Learn to ace the questions that involve both options contracts and stock positions.
  4. 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.
  5. Trading

    Practical And Affordable Hedging Strategies

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

    Prices Plunging? Buy A Put!

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

    Three Ways to Profit Using Put Options

    A brief overview of how to profit from using put options in your portfolio.
  8. Managing Wealth

    Capital Losses and Tax

    Capital losses are never fun to incur, but they can reduce your taxable income. Knowing the rules for capital losses can help you maximize your deductions and make better choices about when to ...
  9. Financial Advisor

    Here's the Best Way to Skirt Capital Gains Taxes

    Taxpayers who know the rules for netting gains/losses can generate additional losses to net against the taxable gains in their portfolios. Here's how.
  10. Trading

    How To Sell Put Options To Benefit In Any Market

    As long as the underlying stocks are of companies you are happy to own, put selling can be a lucrative strategy.
RELATED FAQS
  1. What are unrealized gains and losses?

  2. 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 >>
  3. What is the difference between diversification and hedging?

    Learn what diversification and a hedge are, how investors can diversify and hedge their investments, and the main difference ... Read Answer >>
  4. How can an investor profit from a fall in the price of bank stocks?

    Discover the main ways to take advantage of a fall in bank stocks. Shorting stocks and buying put options can let traders ... Read Answer >>
  5. How can an investor profit from a fall in the utilities sector?

    Learn how an investor can profit from a fall in the utilities sector by employing speculation methods such as short selling ... Read Answer >>
  6. Is it more advantageous to purchase a call or put option?

    Learn the advantages of put and call options to choose the right side of the contract to meet your personal investment objectives. Read Answer >>
Hot Definitions
  1. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  2. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  3. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  4. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  5. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
  6. Real Rate Of Return

    The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other ...
Trading Center