How does a protective put work as portfolio insurance?

A protective put (also called a married put) is essentially buying downside insurance for a stock position. You:

1. Own the underlying stock
2. Buy a put option on that same stock

The insurance analogy:

• The put premium is like an insurance premium
• The strike price is like the deductible boundary — losses beyond this are covered
• The payoff floor is guaranteed regardless of how far the stock falls

Payoff profile:

• Maximum profit: Unlimited (stock can rise indefinitely; put expires worthless)
• Maximum loss: (Purchase price - Strike price) + Premium paid
• Breakeven: Purchase price + Premium paid

Example:

You own shares of Atlas Semiconductor at $100. You buy a put with a $90 strike for $5.

Notice that no matter how far Atlas Semiconductor drops — even to $0 — your maximum loss is capped at $15.

Covered call vs. protective put:

Is it worth the cost? The put premium creates a drag on returns. If the stock rises, you've paid for insurance you didn't need. It's most valuable when:

• You have a concentrated position and can't afford a large loss
• Earnings announcements or macro events create binary risk
• You're bullish long-term but worried about short-term volatility

Explore more options strategies in our CFA Level I derivatives section.