Protective Put

1. Definition

A Protective Put (also known as a Married Put) is a risk-management strategy that involves holding a long position in a stock while simultaneously buying a put option on the same asset. It functions exactly like an insurance policy for your stock portfolio, establishing a floor price below which you cannot lose money.

2. Market View

• Bullish but Cautious: Used when an investor is bullish on the stock's long-term prospects but wants to protect against a potential short-term price collapse due to uncertainty (e.g., earnings reports, macroeconomic shocks).

3. Setup

• Action: Own the Stock (Long) + Buy a Put Option (Long).
• Cost: Price of the Stock + Premium paid for the Put.

4. Mechanism

4.1. If Stock Price Rises

If the stock goes up, the investor profits from the stock's appreciation. The put option expires worthless, just like an insurance policy that wasn't needed. * Net Profit: Stock Gain - Put Premium Paid.

4.2. If Stock Price Crashes

If the stock plummets, the investor exercises the put option to sell the stock at the strike price, neutralizing the loss from the stock drop. * Max Loss: Limited to (Purchase Price - Strike Price) + Premium. The losses stop accumulating below the strike price.

5. Pros & Cons

• Pros: Offers unlimited upside potential while strictly limiting downside risk. It provides peace of mind during volatile markets.
• Cons: The premium cost reduces the overall return. If the stock remains flat or rises only slightly, the cost of the put option acts as a drag on portfolio performance (like paying insurance premiums every month without ever making a claim).