Protective put strategy explained with a worked example
Own the shares, buy a put on them: a floor under your holding for the price of the premium, with the upside kept.
A protective put means you own a stock and buy a put option on the same stock. The put gives you the right to sell at the strike price, so it sets a floor under your holding until expiry. It works like insurance, and the premium is the insurance cost.
Unlike selling the shares or shorting futures, the put leaves you in the market. If the price rises you keep the gain, minus the premium. If it falls below the strike, the put's gain offsets the loss on the shares.
Worked example: payoff at expiry
Illustrative numbers, not market prices. You hold shares bought at ₹1,000 and buy the 950 put for ₹15. Figures are per share; multiply by the lot size the exchange sets for one contract.
800
Shares P&L
-200
Long 950 put
+135
Net P&L
-65
900
Shares P&L
-100
Long 950 put
+35
Net P&L
-65
950
Shares P&L
-50
Long 950 put
-15
Net P&L
-65
1,000
Shares P&L
0
Long 950 put
-15
Net P&L
-15
1,015
Shares P&L
+15
Long 950 put
-15
Net P&L
0
1,100
Shares P&L
+100
Long 950 put
-15
Net P&L
+85
1,200
Shares P&L
+200
Long 950 put
-15
Net P&L
+185
| Stock at expiry | Shares P&L | Long 950 put | Net P&L |
|---|---|---|---|
| 800 | -200 | +135 | -65 |
| 900 | -100 | +35 | -65 |
| 950 | -50 | -15 | -65 |
| 1,000 | 0 | -15 | -15 |
| 1,015 | +15 | -15 | 0 |
| 1,100 | +100 | -15 | +85 |
| 1,200 | +200 | -15 | +185 |
Breakeven, maximum profit and maximum loss
- check_circleMaximum loss = (purchase price minus strike) plus premium = 50 plus 15 = ₹65 per share, at any price at or below 950.
- check_circleBreakeven = purchase price plus premium = 1,000 plus 15 = ₹1,015.
- check_circleMaximum profit = unlimited in principle. Every rupee above 1,015 is profit.
- check_circleWith an at-the-money put (strike equal to purchase price) the maximum loss is just the premium. The workbook's example uses this case: stock at 1,600, 1,600 put for 20, loss capped at 20.
Choosing the strike
The trade-off between protection and cost, with the same illustrative stock bought at ₹1,000.
1,000 put (at the money)
Premium (illustrative)
₹30
Floor kicks in at
1,000
Maximum loss per share
₹30
950 put (out of the money)
Premium (illustrative)
₹15
Floor kicks in at
950
Maximum loss per share
₹65
| Put bought | Premium (illustrative) | Floor kicks in at | Maximum loss per share |
|---|---|---|---|
| 1,000 put (at the money) | ₹30 | 1,000 | ₹30 |
| 950 put (out of the money) | ₹15 | 950 | ₹65 |
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Protective put vs covered call
A protective put BUYS a put: it costs premium, caps the downside and keeps the upside. A covered call SELLS a call: it earns premium, caps the upside and keeps most of the downside. The workbook calls the protective put a synthetic long call and the covered call a synthetic short put.
How Series VIII tests this
Expect a numerical question with a purchase price, a put strike and a premium, asking for the net loss at a lower expiry price or the breakeven. The trap answers forget the gap between purchase price and strike (quoting only the premium as the maximum loss on an out-of-the-money put), or subtract the premium for breakeven instead of adding it.
A concept question asks which option the combined position resembles. A protective put has a floor below and open upside, the shape of a long call. The workbook's answer is 'synthetic long call'.
FAQs
What is a protective put strategy?expand_more
Buying a put option on a stock you already hold. It sets a minimum selling price until expiry, protecting against a fall while keeping the upside, at the cost of the premium.
What is the maximum loss on a protective put?expand_more
Purchase price minus strike, plus the premium. With shares at ₹1,000 and a 950 put for ₹15, it is ₹65 per share. If the strike equals the purchase price, it is just the premium.
What is the breakeven of a protective put?expand_more
Purchase price plus premium paid. ₹1,000 plus ₹15 = ₹1,015.
Why is a protective put called a synthetic long call?expand_more
Long stock plus a long put gives limited loss and unlimited gain, the same payoff shape as buying a call. This page explains the mechanics only; it is not hedging advice.
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