Protective Put for Equity Options

With covered calls and covered puts, you learned about partial hedges. The protective put is fundamentally different; it provides a full hedge for a long stock position, acting as an insurance policy with a defined maximum loss.

Strategy Construction

• A protective put (also called a married put) consists of owning 100 shares of the underlying stock and buying one put option on that stock
• The put acts as an insurance policy; it guarantees the investor can sell shares at the strike price regardless of how far the stock falls
• The cost of this protection is the premium paid for the put
• When the put is purchased at the same time as the stock, it is called a married put; when the put is purchased later to protect an existing stock position, it is called a protective put

Think of it this way: A protective put works like car insurance. You pay a premium (the put cost) hoping you never need it. If the stock crashes, the put kicks in and limits your loss. If the stock rises, you only lost the premium, just like paying for insurance you never used.

Exam Tip: Gotchas

• "Married put" and "protective put" are the same strategy with different timing. The exam may use either term. Married = bought with the stock; protective = bought later to hedge an existing position.

Profit, Loss, and Break-Even

• Maximum gain is unlimited because the stock can rise without limit. The put expires worthless, and the only cost is the premium paid.
• Maximum loss is limited and defined; the worst case is selling at the strike price, losing the difference between cost and strike, plus the premium paid
• The break-even is higher than the stock purchase price because the investor must recover the cost of the put premium before profiting

Example: Buy stock at $50, buy a 45 put for $2

Exam Tip: Gotchas

• The break-even is ABOVE the purchase price. The investor must recover the premium cost before profiting, so break-even = purchase price + premium.
• Maximum loss stays the same no matter how far the stock falls. That is the entire point of the insurance; once the stock drops below the strike, the put covers the rest.

When to Use a Protective Put

• Full hedge (downside protection): The investor wants to protect unrealized gains or limit losses on a stock position while maintaining unlimited upside potential
• Insurance: The premium paid is analogous to an insurance premium; the investor pays a known cost to cap the maximum loss
• Best suited for investors who are bullish long-term but concerned about short-term downside risk

Protective Put vs. Covered Call Comparison

This comparison is frequently tested on the exam:

The key distinction: A protective put costs money but provides unlimited upside and defined downside. A covered call generates income but caps your upside and only partially protects the downside.

Exam Tip: Gotchas

• The protective put is the ONLY basic strategy that provides a full hedge for a long stock position. When the exam asks for the "best protection" for a stockholder, the answer is buying a put, not selling a call (which only provides partial protection).
• A protective put costs money (debit), while a covered call generates income (credit). The exam tests whether you know which strategy requires an outlay versus which one produces income.