Protecting Long Term Investments · Options Trading Guide
A protective put sets a contractual exit floor for matched shares during the option’s life. The protection has a price and an end date.
Match the hedge to the holding
A protective put combines owned shares with a purchased put on the same underlying for the matching deliverable. The strike defines the sale right during the permitted exercise period. Protection applies only for the contract’s life and quantity. A put on a broad index is not an exact hedge for a concentrated single company holding.
Calculate the floor
Assume 100 shares worth $100 each and one 90 put purchased for $3 per share. Initial combined value and outlay are $10,300. At expiration at $70, the shares are worth $7,000 and the put $2,000, leaving $9,000. The loss from the starting combined outlay is $1,300. At $120, the shares are worth $12,000 and the put expires without value, giving $1,700 gross gain.
Choose what to protect
A higher put strike can reduce the unprotected decline but usually increases premium. A longer expiration extends protection at a different cost and volatility exposure. Define the acceptable loss in dollars and the required protection period before comparing quotes. If the shares were bought years earlier at $40, preserving an accounting gain and limiting loss from today’s $100 value are different objectives. Record both reference points without confusing them.
Plan the end of the hedge
An exercised physically settled put can sell the shares. An investor who wants to retain them may instead consider closing the put, subject to available liquidity and broker rules. Letting the hedge expire restores unhedged stock risk. Repeated insurance purchases consume capital even when each period appears modest. Compare renewal costs, reducing the stock holding and using a collar. A hedge should support a written portfolio objective rather than merely make a risky allocation feel safer.
Try it yourself
A stock is $80 and a matching 75 put costs $2. What is the maximum expiration loss from the current combined outlay for 100 shares and one put?
Show the worked answer
The combined outlay is $8,200 and the protected expiration value is at least $7,500. The maximum loss is $700 before costs, while the matched hedge remains effective.
Further reading
Educational material. Examples and rates are hypothetical, not trade recommendations. Product terms, eligibility and risks vary by venue and jurisdiction.
