Protective Put
An options strategy where an investor holding an asset buys a put option against it, paying a premium to limit downside losses below a chosen strike price.
A protective put is an options strategy in which an investor holding an asset buys a put option on that same asset, paying a premium in exchange for the right to sell the asset at the option's strike price regardless of how far the market price falls below it. This effectively sets a floor on the investor's potential losses, functioning similarly to an insurance policy against a sharp price decline.
The tradeoff is the opposite of a covered call (see Kaavon's "Covered Call" glossary definition): rather than capping upside in exchange for income, a protective put costs money upfront (the premium paid) regardless of whether the price ever falls to the strike, reducing overall returns in a flat or rising market in exchange for meaningfully limiting downside risk in a sharp decline. Combining a covered call and a protective put on the same underlying position creates a "collar" strategy, capping both the upside and the downside within a defined range.
Examples
- An investor worried about a near-term crash might buy a protective put on their holdings, accepting the premium cost in exchange for a guaranteed minimum sale price if the market falls sharply.
- Unlike a covered call, which generates income, a protective put costs money upfront and only pays off if the underlying asset's price actually falls below the strike.