Protective Put: Insurance for Your Long Stock

You own 100 shares of stock + buy 1 put option at a strike at or below current price. The put gives you the right to sell those shares at the strike — capping your downside loss. Maximum loss = (current price − strike) + put premium. Upside is unlimited (less the put cost).

(1) You have an unrealized gain you want to lock in before a known catalyst (earnings, regulatory decision). (2) You're forced to hold long for tax reasons but want downside protection. (3) Account is concentrated and a single name's downside would threaten your portfolio.

ATM gives maximum protection but costs the most. OTM puts (5-10% below spot) are cheaper but only kick in after you've already absorbed the first 5-10% loss. For a real hedge, pick the strike that caps your loss at an acceptable level — usually 5-10% below spot for a 30-60 DTE put.

Cost. A 30-DTE ATM put on a moderately volatile stock typically runs 2-5% of the stock price. Over a year of rolling protection, you can spend 20-40% of stock price on insurance — turning a 10% return into negative. Don't blanket-protect; protect tactically around known events.

Protective put = pure downside protection, full upside retained. Collar (long stock + long put + short call) = put paid for by selling a call, but you cap upside. Use the put alone when you want full upside; use the collar when you're OK capping gains to make the protection free or near-free.