Protective Put Calculator

A protective put is a risk management strategy where you own shares of the underlying stock and buy put options to protect against potential price declines. This strategy acts as an insurance policy for your stock holdings, limiting downside risk while allowing for unlimited upside potential.

When to use this calculator:

  • When you own stock and want protection against potential price declines
  • During periods of market uncertainty or expected volatility
  • When you want to maintain long-term stock positions but hedge short-term risk
  • Before significant news events or earnings announcements
  • When you want to establish a known maximum loss for your stock position

Options Strategy Calculator

Calculate P&L for various options strategies

Understanding Protective Puts

Strategy Basics

A protective put consists of two parts:

  • 1. Long Stock Position: You own shares of the underlying stock (typically 100 shares per option contract)
  • 2. Long Put Option: You buy put options for your owned shares, giving you the right to sell at the strike price

Key concept: By purchasing put options, you establish a floor price (the strike price) at which you can sell your shares, regardless of how low the market price falls. This limits your downside risk while maintaining unlimited upside potential.

Calculator Fields

  • Stock Price:

    The current market price of the underlying stock.

  • Shares Owned:

    Number of shares you own (typically in multiples of 100).

  • Put Strike Price:

    The price at which you'll have the right to sell your shares if the put option is exercised.

  • Put Premium:

    The amount you pay per share to purchase the put option.

  • Contracts:

    Number of put option contracts to buy (typically 1 contract per 100 shares).

Results Explained

  • Protection Cost:

    The total cost of buying the put options (premium per share × 100 × number of contracts).

  • Max Loss:

    The maximum potential loss, which is the difference between the current stock price and the put strike price, plus the cost of the puts.

  • Break-Even:

    The stock price at which you will neither gain nor lose money. Calculated as your stock purchase price plus the premium paid per share.

  • Protection Level:

    The percentage of your stock value that is protected, calculated as (Strike Price ÷ Stock Price) × 100.

  • Cost Percentage:

    The protection cost as a percentage of your stock position value.

Strategy Advantages

  • Limits downside risk to a predetermined amount
  • Maintains unlimited upside potential
  • Provides peace of mind during volatile markets
  • Allows you to hold your stock position for long-term growth
  • Can protect unrealized gains in profitable positions
  • Useful for protecting concentrated positions
  • Helps maintain long-term investment strategy during uncertainty
  • Can be adjusted or rolled forward as market conditions change

Strike Price Selection

The strike price you choose affects your protection level and cost:

  • In-the-money (ITM): Strike above current stock price. Higher protection level but more expensive
  • At-the-money (ATM): Strike near current stock price. Balanced protection and cost
  • Out-of-the-money (OTM): Strike below current stock price. Lower cost but less protection (acts like a deductible insurance policy)

Time Horizon Considerations

The expiration date affects your protection duration and cost:

  • Shorter-term: Less expensive but provides protection for a shorter period
  • Longer-term: More expensive but provides protection for an extended period
  • Critical periods: Consider using puts that expire just after significant events (earnings, product launches, etc.)

Comparison to Other Protection Strategies

Protective Puts

  • Unlimited upside potential
  • Defined downside protection
  • Higher cost for complete protection
  • Most straightforward approach

Stop Loss Orders

  • No upfront cost
  • No protection against gaps
  • Forces exit from position
  • No time decay concerns

Collar Strategy

  • Lower cost or zero-cost protection
  • Limited upside potential
  • Still maintains some equity exposure
  • More complex to implement

Important Considerations

  • Protection comes at a cost, which can be substantial (5-15% of position value annually).
  • Put options lose value over time due to time decay (theta), making long-term protection expensive.
  • Consider rolling puts forward before they lose most of their time value.
  • Higher implied volatility will increase the cost of protective puts.
  • Taxes: Protective puts may impact the holding period of your stock position.
  • For more cost-effective protection, consider collars or put spreads if you're willing to cap upside.

Ideal Usage Scenarios

  • Protecting significant unrealized gains in a stock position
  • Hedging a concentrated position that can't be diversified
  • Temporarily protecting a portfolio during uncertain market periods
  • Insuring a position through a high-risk event (earnings, FDA decisions, etc.)
  • Establishing a guaranteed selling price for a future liquidation
  • Reducing portfolio volatility while maintaining positions
  • Implementing a "sleep well at night" strategy for significant holdings
  • For emotional discipline to prevent panic selling during market corrections