Some offers on this page are from advertisers who pay us, which may affect which products we write about, but not our recommendations. See our Advertiser Disclosure. When trading, sudden market downturns can quickly erode your portfolio gains.
Hedging with options is one way to help manage that risk. This guide explains the concept of a protective put, how hedging with options works, and alternative ways to protect your portfolio. Explore options contracts with AlphaSpace A protective put is an options strategy in which an investor buys a put option on a stock they already own.
This acts as downside insurance for existing shareholdings because a put option gains value whenever the stock price drops. One standard options contract always controls 100 shares of stock. So, if you own 100 shares of a stock and want to protect all of them, you buy exactly one put option contract.
If you own 500 shares, you buy five contracts, and so forth. To understand how a protective put works, let's break it down into the three moving parts of the trade: The stock position: You own shares that you plan to hold over the long term. The options contract: You buy a put option linked to those same shares.
This gives you two ways to protect yourself: If the stock price falls, your options contract becomes worth more money. You can sell the contract back to the market for a profit to offset your stock losses — without ever selling your actual shares. If the market completely crashes and you want out of the stock entirely, the contract gives you the right to sell 100 shares at your agreed-upon price (the strike price).
The premium: You pay a fee up front (called the premium) to buy the options contract. This fee is nonrefundable, regardless of what happens to the market. Hedging with options means that, instead of liquidating (selling) your stock position during volatile periods, you add a secondary position — the put option contract — that moves in value counter to your stock.
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