Protective put.
In plain English
A protective put pairs a long stock position with a purchased put on the same shares. The put gives the right to sell at the strike price, so losses below that level are limited no matter how far the stock falls. The cost is the premium, which is paid whether or not the protection is ever needed. Because the premium is a real and recurring expense, continuous protection reduces returns over time. The structure is sometimes compared to insurance, with the strike acting like a deductible: a lower strike costs less and absorbs more loss first.
01Why it matters
It converts an open-ended decline into a known maximum loss plus a known cost, which is a trade-off with a price rather than a free safety net.
02The math, step by step
You own 100 shares at $60 and buy a $55 put for $2.00, paying $200. If the stock falls to $40, the put lets you sell at $55, capping the loss at $5 per share plus the $2 premium. If the stock rises, the $200 is simply gone.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
A stop-loss becomes a market order once triggered and can fill far below the stop price in a fast decline or a gap down. A put is a contract that guarantees the strike price until expiration. One costs nothing and offers no guarantee; the other costs a premium and does.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice