The protective put strategy is a favored choice among conservative Indian investors who wish to hedge their stock positions against potential losses. Also known as a “married put,” this options strategies combines stock ownership with the purchase of a put option to create a safety net if the stock price drops.

What is a Protective Put? A protective put involves buying a put option on a stock you already own. The put option acts as insurance, giving you the right to sell the stock at a specific price (strike price) by the option’s expiration. This strategy ensures that, even if the stock’s price plummets, your losses are limited, as you can sell at the predetermined strike price.

When to Use the Protective Put Strategy Protective puts are ideal when:

• Market Volatility is High: When you expect sharp price swings, a protective put provides peace of mind by setting a minimum exit price.
• You Have Long-Term Holdings: If you’re committed to holding a stock but are concerned about short-term price drops, a protective put can act as a safety buffer.

Example of a Protective Put in India Suppose you own 100 shares of TCS, currently priced at ₹3,500 per share, and you’re worried about potential market volatility. You can buy a put option with a strike price of ₹3,400, expiring in one month, for a premium of ₹50 per share. Here’s how it can play out:

• If TCS falls below ₹3,400, you have the option to sell at ₹3,400, thus minimizing your losses. The maximum loss is limited to the difference between your stock’s purchase price and the strike price, plus the premium paid.
• If TCS remains above ₹3,400, the put option expires worthless, but you still hold the shares and can benefit from any price appreciation.

Benefits of Protective Puts

1. Downside Protection: The put option establishes a floor price for the stock, limiting potential losses.
2. Flexibility: You can continue to hold the stock, allowing for potential gains if the price recovers or rises.

Risks and Costs The main drawback of protective puts is the cost of the premium. Since you pay this amount upfront, it can reduce the overall profit on the stock if the put option expires unused. Additionally, if you frequently purchase protective puts, these costs can add up.

Advantages of Protective Puts in the Indian Market

• Long-Term Holders: For investors looking to stay invested in quality stocks but wary of short-term dips, protective puts offer a way to reduce risk.
• Portfolio Stability: This strategy enables investors to pursue their long-term financial goals without worrying about market downturns.

The protective put strategy provides a balanced approach for Indian investors, combining stock ownership with downside protection. In our next article, we’ll explore the long straddle, a strategy for capitalizing on market volatility.