how a protective put works
protective puts are commonly utilized when an investor is long or purchases shares of stock or other assets that they intend to hold in their portfolio typically an investor who owns stock has the risk of taking a loss on the investment if the stock price declines below the purchase price by purchasing a put option any losses on the stock are limited or capped the protective put sets a known floor price below which the investor will not continue to lose any added money even as the underlying asset s price continues to fall a put option is a contract that gives the owner the ability to sell a specific amount of the underlying security at a set price before or by a specified date unlike futures contracts the options contract does not obligate the holder to sell the asset and only allows them to sell if they should choose to do so the set price of the contract is known as the strike price and the specified date is the expiration date or expiry one option contract equates to 100 shares of the underlying asset also just like all things in life put options are not free the fee on an option contract is known as the premium this price has a basis on several factors including the current price of the underlying asset the time until expiration and the implied volatility iv how likely the price is going to change of the asset strike prices and premiumsa protective put option contract can be bought at any time some investors will buy these at the same time and when they purchase the stock others may wait and buy the contract at a later date whenever they buy the option the relationship between the price of the underlying asset and the strike price can place the contract into one of three categories known as the moneyness these categories include investors looking to hedge losses on a holding primarily focus on the atm and otm option offerings 