Protective put

A protective put is a strategy where an investor who already owns shares of a stock buys a put option on that same stock to limit potential downside losses. The put gives the holder the right to sell the shares at the strike price no matter how far the stock falls, effectively setting a floor under the value of the position for as long as the put remains open.

The strategy works like an insurance policy. The investor pays a premium upfront for the put, and in exchange gains protection against a large decline in the stock. If the stock falls sharply, the gain on the put option offsets the loss on the shares, with the loss capped at the difference between the price paid for the stock and the strike price, plus the premium spent on the put. If the stock instead rises or stays flat, the put expires worthless and the investor simply loses the premium, the same way an insurance policy costs money whether or not it is ever used.

Investors typically use a protective put when they want to stay invested in a stock through an uncertain period, such as ahead of an earnings report or a broader market downturn, without selling shares they believe in for the long run. The cost of that protection is the premium paid, which reduces overall returns if the feared decline does not happen, so the strategy involves a direct tradeoff between the certainty of limited downside and the ongoing cost of buying that protection repeatedly.