4/8/23, 6:33 PM Protective Put | Trading Put Options - The Options Playbook

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The Options Strategies » Protective Put

Protective Put

The Setup
You own the stock
Buy a put, strike
price A
Generally, the stock
price will be above
strike A

Who Should Run

It
NOTE: This graph indicates profit and loss at expiration, respective to the stock
value when you bought the put. Rookies and higher

The Strategy When to Run It

Purchasing a protective put gives you the right to sell stock you already own at You’re bullish but
strike price A. Protective puts are handy when your outlook is bullish but you want nervous.
to protect the value of stocks in your portfolio in the event of a downturn. They can
also help you cut back on your antacid intake in times of market uncertainty.

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Protective puts are often used as an alternative to stop orders. The problem with
stop orders is they sometimes work when you don’t want them to work, and when
you really need them they don’t work at all. For example, if a stock’s price is
Break-even at
fluctuating but not really tanking, a stop order might get you out prematurely. If that Expiration
happens, you probably won’t be too happy if the stock bounces back. Or, if a major
news event happens overnight and the stock gaps down significantly on the open, From the point the
you might not get out at your stop price. Instead, you’ll get out at the next available protective put is
market price, which could be much lower. established, the break-even
point is the current stock
If you buy a protective put, you have complete control over when you exercise your price plus the premium paid
option, and the price you’re going to receive for your stock is predetermined. for the put.
However, these benefits do come at a cost. Whereas a stop order is free, you’ll have
to pay to buy a put. So it would be nice if the stock goes up at least enough to cover
the premium paid for the put. The Sweet Spot
If you buy stock and a protective put at the same time, this is commonly referred to You want the stock to go to
as a “married put.” For added enjoyment, feel free to play a wedding march and infinity and the puts to
throw rice while making this trade. expire worthless.

Options Guy's Tip Maximum

Potential Profit
Many investors will buy a protective put when they’ve seen a nice run-up on Potential profit is
the stock price, and they want to protect their unrealized profits against a downturn. theoretically unlimited,
It’s sometimes easier to part with the money to pay for the put when you’ve already because you’ll still own the
seen decent gains on the stock. stock and you have not
capped the upside.

Maximum
Potential Loss
Risk is limited to the
“deductible” (current stock
price minus the strike price)
plus the premium paid for
the put.

Ally Invest
Margin
Requirement
After the trade is paid for,
no additional margin is
required.

As Time Goes By
For this strategy, time
decay is the enemy. It will
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negatively affect the value

of the option you bought.

Implied Volatility
After the strategy is
established, you want
implied volatility to
increase. That will increase
the price of the option you
bought.

Check your strategy with Ally Invest tools

Use the Profit + Loss Calculator to establish break-even points, evaluate how your strategy might
change as expiration approaches, and analyze the Option Greeks.

Don’t have an Ally Invest account? Open one today!

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