protective put
An options strategy where an investor who owns shares purchases put options to protect against downside risk, acting as portfolio insurance.
Example
“Before a major earnings announcement, he bought protective puts on his portfolio to limit potential losses.”
Memory Tip
PROTECTIVE put = insurance for your stock. Pay a premium, protect against crashes.
Why It Matters
Protective puts help individual investors manage risk in their stock portfolios by limiting potential losses while keeping upside gains. This strategy is particularly important during uncertain market conditions when you want to sleep at night knowing your investments have a safety net in place.
Common Misconception
Many people think protective puts eliminate all losses, but they actually only protect against losses below a certain price level. The cost of buying the put option itself reduces your overall returns, so you are paying for insurance rather than getting free protection.
In Practice
Suppose you own 100 shares of a company trading at $50 per share and you are worried about a market downturn. You purchase a put option with a $45 strike price for $2 per share, costing you $200 total. If the stock drops to $40, your put option limits your loss to $5 per share instead of $10, but you still paid the $2 premium, resulting in a net $7 loss per share.
Etymology
PROTECTIVE (guarding against loss) PUT (put option). A PUT that is PROTECTIVE of the stock position.
Common Misspellings
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Related Terms
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