should the price of the asset and the strike price be the same the contract is considered at the money atm an at the money put option provides an investor with 100 protection until the option expires many times a protective put will be at the money if it was bought at the same time the underlying asset is purchased 
an investor can also buy an out of the money otm put option out of the money happens when the strike price is below the price of the stock or asset an otm put option does not provide 100 protection on the downside but instead caps the losses to the difference between the purchased stock price and the strike price investors use out of the money options to lower the cost of the premium since they are willing to take a certain amount of a loss also the further below the market value the strike is the less the premium will become for example an investor could determine they re unwilling to take losses beyond a 5 decline in the stock an investor could buy a put option with a strike price that is 5 lower than the stock price thus creating a worst case scenario of a 5 loss if the stock declines different strike prices and expiration dates are available for options giving investors the ability to tailor the protection and the premium fee a protective put is also known as a married put when the options contracts are matched one for one with shares of stock owned potential scenarios with protective putsa protective put keeps downside losses limited while preserving unlimited potential gains to the upside however the strategy involves being long the underlying stock if the stock keeps rising the long stock position benefits and the bought put option is not needed and will expire worthlessly all that will be lost is the premium paid to buy the put option in this scenario where the original put expired the investor will buy another protective put again protecting their holdings protective puts can cover a portion of an investor s long position or their entire holdings when the ratio of protective put coverage is equal to the amount of long stock the strategy is known as a married put married puts are commonly used when investors want to buy a stock and immediately purchase the put to protect the position however an investor can buy the protective put option at any time as long as they own the stock the maximum loss of a protective put strategy is limited to the cost of buying the underlying stock along with any commissions less the strike price of the put option plus the premium and any commissions paid to buy the option the strike price of the put option acts as a barrier where losses in the underlying stock stop the ideal situation in a protective put is for the stock price to increase significantly as the investor would benefit from the long stock position in this case the put option will expire worthlessly the investor will have paid the premium but the stock will have increased in value for the cost of the premium protective puts provide downside protection from an asset s price declines protective puts allow investors to remain long a stock offering the potential for gains if an investor buys a put and the stock price rises the cost of the premium reduces the profits on the trade if the stock declines in price and a put has been purchased the premium adds to the losses on the trade real world example of a protective putlet s say an investor purchased 100 shares of general electric company ge stock for 10 per share the price of the stock then increased to 20 giving the investor 10 per share in unrealized gains unrealized because it has not been sold yet the investor does not want to sell their ge holdings because the stock might appreciate further they also do not want to lose the 10 in unrealized gains the investor can purchase a put option for the stock to protect a portion of the gains for as long as the option contract is in force the investor buys a put option with a strike price of 15 for 75 cents which creates a worst case scenario of selling the stock for 15 per share the put option expires in three months if the stock falls back to 10 or below the investor gains on the put option from 15 and below on a dollar for dollar basis in short anywhere below 15 the investor is hedged until the option expires the option premium cost is 75 0 75 x 100 shares as a result the investor has locked in a minimum profit equal to 425 15 strike price 10 purchase price 5 0 75 premium 4 25 x 100 shares 425 to put it another way if the stock declined back to the 10 price point unwinding the position would yield a profit of 4 25 per share because the investor earned 5 in profit the 15 strike less 10 initial purchase price minus the 0 75 cents premium if the investor didn t buy the put option and the stock fell back to 10 there would be no profit on the other hand if the investor bought the put and the stock rose to 30 per share there would be a 20 gain on the trade the 20 per share gain would pay the investor 2 000 30 10 initial purchase x 100 shares 2000 the investor must then deduct the 75 premium paid for the option and would walk away with a net profit of 1925 of course the investor would also need to consider the commission they paid for the initial order and any charges incurred when they sell their shares for the cost of the premium the investor has protected some of the profit from the trade until the option s expiry while still being able to participate in further price increases finally the investor should realize that the 75 premium for the put is essentially the cost of insurance on the position one could argue that they would have been better off not buying the put at all if it remains above 10 however as with all insurance it provides peace of mind and protection in the case of an adverse event 