Protective Put Strategy
Hedge downside risk by buying put options against stock positions. The classic portfolio insurance strategy that limits losses while maintaining unlimited upside potential.
Overview
The protective put (also called "married put") is the classic portfolio insurance strategy. You buy (or own) 100 shares of stock and purchase a put option to protect against downside risk. The put acts as insurance—you pay a premium for the right to sell at the strike price.
This strategy is ideal when you are bullish but want protection. You maintain unlimited upside potential while capping your maximum loss at the strike price minus your entry, plus the premium paid. It's like buying insurance on your house—you hope you never need it, but it provides peace of mind.
The protective put has the same payoff profile as a synthetic long call at the same strike. This equivalence (put-call parity) means owning stock plus a put equals owning a call plus cash. The strategy is popular during uncertain markets or when protecting unrealized gains.
Key Insight
Protective Put Payoff at Expiration
This diagram shows the profit/loss at expiration for different stock prices.Loss is capped, upside is unlimited.
Research
Research on protective puts, portfolio insurance, and hedging effectiveness.
The Mathematics
In Plain English
The math behind this strategy is straightforward. Here's what you're actually doing:
- 1Buy 100 shares of stock at the current price (S₀)
- 2Buy 1 put option with strike price K ≤ S₀, paying premium D
- 3At expiration, if stock is above strike K: put expires worthless, keep stock gains
- 4At expiration, if stock is below strike K: exercise put, sell at K, loss is capped
- 5Breakeven price = Original stock price plus premium paid
That's it. The formulas below just express this process precisely.
1Profit at Expiration
Where S_T is stock price at expiration, S_0 is initial price, K is strike, D is premium paid
2Breakeven Price
Stock must rise by the premium amount to break even
3Maximum Profit
Stock can rise infinitely; put simply expires worthless
4Maximum Loss
Limited to difference between entry and strike, plus premium paid
Strategy Rules
Entry Rules
- 1Own (or buy) 100 shares of the underlying stock
- 2Buy 1 put option per 100 shares owned
- 3Choose strike price based on protection level needed (ATM or OTM)
- 4Select expiration based on protection timeframe (30-90 days typical)
- 5Consider cost of protection vs. potential loss being hedged
Exit Rules
- 1If stock > strike at expiration: put expires worthless, continue holding stock
- 2If stock < strike at expiration: exercise put to sell at K, or sell put for intrinsic value
- 3Can sell put early if stock rises and protection no longer needed
- 4Roll to later expiration to maintain continuous protection
- 5Close entire position (sell stock, sell put) if thesis changes
Strike Selection
- At-the-money (ATM): Maximum protection, highest cost (~2-5% of stock price)
- Out-of-the-money (OTM): Cheaper protection, accept more downside before hedge kicks in
- 5-10% OTM: Common choice balancing cost and protection
- Deep OTM: Catastrophic insurance only, minimal cost
Cost Management
- Calculate annualized cost: (Premium / Stock Price) × (365 / Days to Expiration)
- Compare protection cost to historical volatility of the stock
- Consider collars (sell call to offset put cost) if cost is prohibitive
- Use puts selectively around high-risk events rather than continuously
Implementation Guide
Implementing a protective put is straightforward. The key decision is balancing the cost of protection against the level of downside coverage needed.
Determine Protection Needs
Decide why you need protection and for how long. Is this for a specific event (earnings, macro uncertainty) or ongoing insurance? The purpose determines strike selection and expiration.
- Event-based protection: Short-dated options around the specific event
- Ongoing insurance: Roll monthly or quarterly puts
- Protecting gains: Consider how much profit you are willing to give back
Calculate Protection Cost
Before buying, calculate the annualized cost of protection. A $3 put on a $100 stock for 30 days costs roughly 36% annualized. This cost erodes returns over time.
- Annualized cost = (Put Price / Stock Price) × (365 / DTE)
- Compare to expected stock return—protection that costs more than expected gains is poor value
- Higher implied volatility means higher put prices
Continuous protective put buying historically underperforms both buy-and-hold and simple position sizing. Use selectively.
Select Strike and Expiration
ATM puts provide maximum protection but cost more. OTM puts are cheaper but leave a gap before protection starts. Longer expirations cost more per day but require less frequent rolling.
- 5-10% OTM is a common balance of cost and protection
- 30-45 day puts offer good time decay characteristics
- Avoid very long-dated puts—you pay for time value you may not need
Execute the Trade
Buy to open the put option. If also buying the stock, some brokers offer combined "buy-write" style orders. Use limit orders between bid and ask.
- Use limit orders, not market orders
- Check open interest and volume for liquidity
- Consider buying puts on down days when they may be cheaper
Monitor and Manage
Track your protected position. If the stock rises significantly, consider selling the put to recapture some premium. If the stock falls, decide whether to exercise or roll.
- Set alerts at key price levels (strike, breakeven)
- Consider selling put if it drops to 20% of purchase price
- Roll before expiration if continuing protection is needed
- Document your hedging costs for performance analysis
Helpful Tools & Resources
Strategy Variations
Explore different ways to implement this strategy, each with its own trade-offs and benefits.
Collar Strategy
Add a covered call above the current price to offset the put cost. This caps upside but creates a "zero-cost" or low-cost protection zone.
Popular for protecting large appreciated positions
Married Put
Buy stock and put simultaneously as a single trade. Establishes the holding period from the stock purchase date for tax purposes.
Same strategy, different tax treatment timing
Put Spread Hedge
Instead of buying a single put, buy a put spread (buy higher strike, sell lower strike). Cheaper but caps the protection at the lower strike.
Good when catastrophic protection is not needed
Rolling Protection
Continuously roll protective puts before expiration. Provides ongoing insurance but accumulates significant cost over time.
Research shows this often underperforms reducing position size
Risks & Limitations
The primary risk of protective puts is their cost. Continuously buying puts can erode 2-5% or more of portfolio value annually. Over time, this drag often exceeds the protection benefits.
If market declines happen after your put expires or before you buy, you get no protection. Perfect timing is nearly impossible, making continuous coverage expensive.
Put prices are highest when volatility is high—often after a decline has already occurred. Buying protection when you most want it is when it costs the most.
Having protection can encourage taking excessive risk elsewhere. The psychological comfort of the hedge may lead to poor decisions in other parts of the portfolio.
References
- Merton, R.C., Scholes, M.S. & Gladstein, M.L. (1982). The Returns and Risks of Alternative Put-Option Portfolio Investment Strategies. Journal of Business, 55(1), 1-55 [Link]
- Israelov, R. (2017). Pathetic Protection: The Elusive Benefits of Protective Puts. SSRN Working Paper [Link]
- Foltice, B. (2021). Revisiting Covered Calls and Protective Puts: A Tale of Two Strategies. SSRN Working Paper [Link]
- Kakushadze, Z. & Serur, J.A. (2018). 151 Trading Strategies. SSRN Working Paper [Link]
- Leland, H.E. (1980). Who Should Buy Portfolio Insurance?. Journal of Finance, 35(2), 581-594 [Link]
Options trading involves significant risk and is not appropriate for all investors. Protective puts have a cost that reduces returns over time. Before trading options, read the Characteristics and Risks of Standardized Options document. Past performance does not guarantee future results.
Ready to explore more options strategies?
Learn covered calls, spreads, straddles, and more advanced options strategies.
Browse Options Strategies