Protective Puts
What It Is
A protective put is a risk‑management strategy where an investor buys a put option to protect a stock position from downside losses.
Why It Matters
It acts like insurance, limiting losses while preserving upside potential.
How It Works
- Investor owns shares
- Buys a put option at a chosen strike
- Put increases in value if stock falls
- Losses are capped at the strike price
Key Components
- Downside protection
- Insurance cost (premium)
- Strike selection
- Risk management
Example
Owning a stock at $60 and buying a $55 put limits maximum loss to $5 plus the premium paid.
Key Takeaways
- Protective puts cap downside risk.
- They cost money but preserve upside.
- Useful during uncertain markets.