Protective Put: Insurance for a Long Stock Position
A protective put pairs 100 shares of stock with one long put, creating a position with capped downside but unlimited upside. Cost is the put premium. The structure is functionally identical to a long call at the same strike — same payoff diagram, same Greeks, but using the stock you already own.
Use cases: hedging a concentrated stock position before earnings, protecting a position with embedded long-term capital gains (selling shares would trigger taxes), or buying portfolio insurance through a major event (Fed announcement, geopolitical risk). The cost is real — 1–3% of position size for OTM puts at 60–90 DTE — but it caps disaster while preserving upside.
Mechanics: choose a put strike at the maximum drawdown you're willing to tolerate. A 5% OTM put caps losses at roughly 5% plus the premium paid. Deeper OTM puts are cheaper but allow more drawdown before the hedge kicks in. Term-match the put to the duration of the risk you're hedging — earnings hedges should expire shortly after the event, not months later (that's wasted theta).
Frequently Asked Questions
Is a protective put always worth the cost?
On large positions where a 30%+ drawdown would force you to sell at the worst time, yes. On smaller speculative positions, often not.
How does a protective put compare to a stop-loss order?
A protective put guarantees a fill at the strike; a stop-loss can slip dramatically on gaps. Puts also let you ride volatility through to the upside; a stopped-out trade is gone.