Definition
Protective Put
A protective put is buying a put option on shares you own to insure against a fall in price.
Think of it as insurance: you hold the stock and pay a premium for a put that lets you sell at a fixed strike if the price crashes. Your downside is capped at the strike (minus the premium paid), while your upside stays fully open.
An Indian investor holding a large Infosys position before results, for example, might buy a protective put to guard against a gap-down, accepting the premium cost as the price of peace of mind. Because NSE stock options are physically settled and traded in lots, the hedge works best when holdings match the lot size.
Related terms
- Covered CallA covered call means holding the underlying shares and selling a call option against them to earn premium.
- CollarA collar holds the stock, buys a protective put, and sells a covered call to fund the put — capping both downside and upside.
- HedgingHedging is taking an offsetting position to protect a portfolio against adverse price moves, like insurance for your investments.
- Put OptionA put option gives its buyer the right, but not the obligation, to sell an asset at a fixed strike price before expiry — buyers profit when the price falls.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.