Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Protective Put

What it is:

An investor employs a protective put strategy when he purchases a put option of a stock of which he already owns shares.

How it works (Example):

A protective put is usually used by an investor who has unrealized gains on a stock. If there are concerns about the stock losing value, a protective put allows the investor to sell the stock at the put's strike price until the option contract expires, no matter how much the stock's value decreases. If the price of the stock suddenly and significantly decreases, the owner has time to sell the stock without being hurt by the loss.

Why it Matters:

The protective put guarantees an investor the ability to sell a stock at the strike price of the option contract, and control over when he wishes to sell the stock. The maximum loss the investor can incur is the Strike Price - (Stock Purchase Price + Contract Premium).