Protective Put Explained: Breakeven, Max Loss, Max Gain
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A protective put is owning a stock and buying a put on it. The put gives the right to sell at the strike price, so the loss on the stock is limited, at the cost of the premium. Breakeven is the stock cost plus the premium, and the gain on the upside has no cap.
The mechanics
FINRA describes a put as giving the purchaser the right, but not the obligation, to sell shares at the strike price, and says a standard options contract covers 100 shares of the underlying security. It also says the price paid for an option is the premium and that, for the buyer, the premium paid is the maximum loss on the option.
In a protective put you hold the shares and also buy the put. Below the strike, each dollar the stock falls is offset by a dollar of put value, so the position's loss stops growing. Above the strike, the put expires worthless and you keep the stock's gains minus the premium you paid. This page uses the term to mean exactly that two-part position.
The three numbers exams ask for
Breakeven: stock cost plus premium. Maximum loss: stock cost minus strike, plus premium (when the strike is at or below cost). Maximum gain: unlimited, because the stock can keep rising while the put's cost is fixed.
Worked example: 100 shares bought at $50 with a $45 put
You buy 100 shares at $50.00 and buy one put contract (100 shares) with a $45.00 strike for a premium of $2.00 per share. Results are at expiration, per share and per contract, before commissions and taxes.
| Stock at expiration | Profit or loss per share | Per contract (100 shares) |
|---|---|---|
| $40.00 | -$7.00 | -$700 |
| $45.00 | -$7.00 | -$700 |
| $50.00 | -$2.00 | -$200 |
| $52.00 | $0.00 | $0 |
| $60.00 | $8.00 | $800 |
- Breakeven: $50.00 + $2.00 = $52.00 per share.
- Maximum loss: ($50.00 - $45.00) + $2.00 = $7.00 per share, or $700 per contract. It is reached at any stock price at or below $45.00.
- Maximum gain: unlimited. At $60.00 the position makes $8.00 per share ($800 per contract), and it keeps growing dollar for dollar as the stock rises.
Common exam traps
- Do not confuse this with a long put alone. A long put's breakeven is strike minus premium ($45.00 - $2.00 = $43.00); the protective put's is stock cost plus premium ($52.00).
- The premium is part of the maximum loss. Stock cost minus strike alone understates it.
- The protection lasts only until the put expires. After that the stock is unhedged again.
- One contract covers 100 shares. Per-contract figures are per-share figures times 100.
- A protective put is a purchase of a put, so it is a debit. Selling a put is a different position with different risks.
Practice and related pages
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General education only, not investment advice. Worked examples use illustrative figures and ignore commissions and taxes. Rules change, so confirm with the linked sources.