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Protective put

Buying a put against shares you own to set a floor under their price — insurance for a paid premium.

A protective put is insurance for stock you already own. You buy a put on the shares you hold, which gives you the right to sell them at the strike no matter how far the price falls. If the stock drops below that strike, the put gains value and offsets your losses; if it rises, you simply let the put expire and keep the upside minus the premium you paid.

Say you own 100 shares of a stock at 50 and buy a 45 put for 1.50. Your maximum loss is now capped: below 45 the put covers you, so the worst case is roughly 6.50 per share (the 5 drop to the strike plus the premium), while your upside stays open. Traders often use this ahead of earnings or when they want to stay invested through a nervous stretch without selling.

The common mistake is treating it as free protection. The premium is a real, recurring cost, and theta eats it away every day the stock stays flat. Buying a strike too far out of the money makes the put cheap but leaves a wide gap of unprotected losses, so match the strike and expiry to the risk you actually want to cover.

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