The Protective Put

A protective putBuying a put to insure a stock holding against a fall. works exactly like insurance on your car — and understanding it that way makes everything obvious. You pay a premium (the putThe right, not the obligation, to buy or sell at a set price.’s cost) for coverage against a large loss; the strikeThe fixed price at which an option can be exercised. is your deductible (losses above it you absorb, below it you’re protected). If disaster strikes (the stock crashes), the putThe right, not the obligation, to buy or sell at a set price. pays off and caps your loss; if nothing happens, you simply lose the premium — like an insurance year with no claim. So a protective putBuying a put to insure a stock holding against a fall. lets you stay invested for the upside while capping your downside to a known maximum. The cost is the premium drag, which is why you use it selectively — around feared events or to protect big gains — rather than permanently.