Protective Put 101 — Insurance Approach

What is a Protective Put?

A Protective Put — often called a Married Put — is a defensive options strategy that combines owning stock with buying a put option on the same stock. The put acts like an insurance policy. If the stock price falls, the put gains in value and cushions the loss on the stock. At the same time, you continue to enjoy unlimited upside potential if the stock rises, minus the cost of the premium paid.

This strategy is widely used by long-term investors who want to stay invested in their favorite stocks while managing risk during uncertain market conditions. It gives you peace of mind knowing that, no matter what happens, your downside risk is capped.

• Downside limited: Losses stop at the strike level minus the premium cost.
• Upside preserved: Gains remain open on the stock, reduced only by the premium.
• Insurance mindset: Premium = cost of peace of mind.

When to Use

You should consider protective puts when you want to remain invested but feel nervous about short-term risks. They are best in times of volatility, earnings uncertainty, or when markets look unstable but you don’t want to sell your holdings.

• You are bullish or a long-term investor but want insurance against a sharp decline.
• Volatility is relatively low, making puts cheaper to buy.
• You value peace of mind and are willing to pay a premium for downside protection.

Setup Checklist

To set up a protective put, ensure you have the underlying shares and then purchase a matching put option. The expiry and strike you choose will determine how much insurance you get and how much it costs.

• Choose a liquid stock/index: Only use underlyings with active option markets.
• Own sufficient shares: You must already own stock (or plan to buy it).
• Select expiry: Typically 2–8 weeks, aligned with your risk horizon.
• Pick strike: At-the-money (ATM) or slightly below (OTM), depending on how much downside you want to protect.

Entry Rules

A protective put involves two legs: holding stock and holding a put. Together, they form the "married" structure. To implement it, follow these steps:

1. Buy or already hold 1 lot of the underlying shares.
2. Buy 1 put option on the same stock with matching expiry and strike near the stock price.
3. Record your stock entry, put premium, and effective breakeven (stock price + premium).

Risk & Management

The beauty of a protective put is that it locks in your worst-case scenario. No matter how far the stock falls, your maximum loss is capped. However, the trade-off is that the insurance (premium) is a recurring cost if you use it often.

• Downside risk: Limited — losses stop once the stock reaches the put strike (minus premium).
• Upside potential: Unlimited gains on the stock, reduced only by the premium paid.
• Cost factor: Premiums are the price of safety. Using them repeatedly can reduce returns.
• Adjustment: If the stock rises strongly, consider selling the put early to cut costs.

Exit Rules

You have flexibility in how to exit a protective put position. You can hold both legs until expiry, or adjust depending on market movement. Here are common approaches:

• If stock rises: Continue holding stock; the put will lose value but your stock gains offset it.
• If stock falls: Use the put — either exercise it or sell it for profit to offset stock losses.
• If outlook changes: Before expiry, you can close both stock and put together.

Position Sizing

Protective puts are most useful on core or large holdings. Insuring every small stock in your portfolio may be costly and inefficient. Use them strategically for peace of mind on high-value or high-risk positions.

• Use protective puts on key holdings you don’t want to sell.
• Apply them to high-conviction or large portfolio positions.
• Balance cost and benefit — don’t over-insure unnecessarily.

Example

Suppose you hold 100 shares of a stock trading at ₹1000. You buy a put option with strike ₹980, expiring in 30 days, for a premium of ₹20.

• If stock stays above ₹980: The put expires worthless, and you lose the ₹20 premium — cost of insurance.
• If stock falls to ₹900: Stock loses ₹100, but the put gains about ₹80. Net loss = ₹20, the premium cost.
• Breakeven: Stock price + premium = ₹1000 + ₹20 = ₹1020. You profit above this level.

Key Metrics to Track

To evaluate the efficiency of a protective put, monitor its cost and impact on your portfolio. These metrics help you decide whether it is worth applying regularly or only occasionally.

• Cost of protection: Premium cost as % of stock value.
• Frequency: How often you buy puts — regular use can add up.
• Breakeven: Stock entry + premium paid.
• Portfolio insurance: Allocation to protective puts as % of portfolio.

Comparison: Protective Put vs Stop-Loss Order

Both protective puts and stop-loss orders aim to reduce downside, but they work differently. A stop-loss is free to place but not guaranteed to execute exactly at your price, while a protective put costs money but gives certainty of protection. The table below highlights the differences:

In summary, the Protective Put is a powerful risk management tool for investors who want to stay invested while reducing downside exposure. The key is to balance the cost of premiums with the peace of mind and security they bring. Use them strategically, not mechanically, to protect high-value or long-term holdings during volatile times.