Buy a put on shares you own: insurance against a sharp drop. You pay a premium to protect your portfolio.
The structure
A Protective Put (Protective Put) is explicit portfolio insurance: you own 100 shares and buy a put on them. However far the stock falls, you keep the right to sell it at the Strike Price, so the loss is capped in advance at a known price.
Its economic logic
It is literally an insurance policy: you pay a premium for protection against disaster, and it expires with no payout if disaster does not happen. It is common around worrying events, or to protect large paper gains without selling the position and what that triggers.
Maximum profit and loss
Upside stays fully open, minus the cost of the insurance premium, and the maximum loss is fixed: the distance from the stock price to the strike, plus the premium. Breakeven: the current stock price plus the premium.
Hypothetical example
Stock at $200 with a large paper gain, and a three-month put bought at a $190 strike for a $6 premium: the worst case is now a loss of $16 per share, whatever happens. A crash to $150? You sell at $190 by right.
Common mistake
Insurance with no occasion: buying protection every month all year drains cumulative premiums that eat the returns of quiet years. Insurance is a tool for particular events and phases, not a default position.
When it is worth the cost
Permanent protection eats the return, so it is bought selectively: when clear warning signs line up (extreme valuations, negative Gamma structure, a scheduled major event) or when Implied Volatility is cheap and insurance is affordable. Buying it in the middle of a crash means paying inflated volatility to insure a house that is already on fire.
Where to see it on the platform
The options calculator charts the effect of protection on the portfolio curve, and the Greeks page explains it among the illustrated strategies.
The structure calculator works out its cost and its floor, and the regime indicators flag when warning signs line up.
