Definition
A protective put, also called a married put, involves buying a put option while holding the underlying stock. This acts as insurance, limiting downside losses to the strike price minus the stock cost plus the premium paid. It's a hedging strategy that preserves unlimited upside potential.
Formula
Max Loss = (Stock Cost - Strike Price) + Premium Paid
Example
You own stock at $100 and buy a $95 put for $3. Your maximum loss is capped at $8 ($5 + $3), regardless of how far the stock falls.
FAQ
What is Protective Put?
Buying a put option to protect against downside in a stock you own.
How do you calculate Protective Put?
A common formula for Protective Put is: Max Loss = (Stock Cost - Strike Price) + Premium Paid
Why is Protective Put important?
Protective Put helps investors evaluate options and make more informed decisions.