Protective PUT

Protective PUT helps you protect your stock portfolio in case of an unexpected downturn. Although you are expecting volatility and uncertainty in the short term, your long term view on the stock you own remains bullish. Remember, your view still remains bullish. That is why you are owning the stock in the first place.

Protective PUT can also be used as a STOP LOSS mechanism instead of setting a stop loss everyday for your stock. Sometimes the stop loss is hit and the stock immediately rebounds upwards. You want to avoid this. Otherwise, you have to buy the stocks again which will lead to higher brokerage and commission costs as you are planning to hold the stock long term.

Protective PUTs also help you protect your stock portfolio and positions overnight unlike stop loss which works only intraday. You have to set a new stop loss after market opens the next day.

Protective PUTs can also be used to lock in your gains from the stock. If the stock falls, the PUT premium will go up protecting your profits. If the stock shoots up more than the premium of your PUT, you will get more profits. Protective PUTs can be visualized as a Trailing Stop Loss.

Trade Set-Up


Buy or Own Stock

Buy Future or Stock-Finvezto


Naked Put-Finvezto

Protective PUT

Naked Call-Finvezto

Illustration Using Nifty Futures & Options

Protective Put-Finvezto
Snapshot from Strategy Builder

In the pay-off graph above, the price of the underlying asset (Nifty) is plotted in the X-Axis and the profit/loss is plotted in the Y-Axis.

The black line with dots indicates the profit or loss at different prices of the underlying asset.

The region shaded in green indicates profitable zone and the region shaded in grey indicates loss zone.

A positive number (75 = Buy 1 lot) in the Quantity column indicates a Buy position and a negative number (-75 = Sell 1 lot) indicates a Sell position.

Entry Checklist

Market Outlook
  • When you expect uncertainty and high volatility in the stock price
  • Volatility
  • Implied Volatility or India VIX should be low when you buy the PUT Option and volatility should be increasing persistently
  • Strike Price
  • Buy PUT options that are Out-of-the-Money and below the support zone
  • Positional or Intraday?
  • If you hold stocks in your portfolio, you can use PUT options to protect your stocks overnight
  • Buy weekly PUTs if you expect volatility just for a day or two
  • Buy near month PUT options if you expect volatility to persist for more than a week
  • Risk Profile

    Risk [Loss]
  • Risk is limited. If the Stock price stays above the strike price of the PUT, you only lose the premium paid
  • If the stock price tanks, the PUT option will increase in value and make up for the loss
  • Risk is limited to the difference between the stock price and strike price of the PUT plus the premium paid for the PUT
  • Reward [Profit]
  • Maximum reward is when the stock breaks through the roof and reaches new highs
  • Another reward is the peace of mind that the investors get by holding the PUT options to protect their stocks
  • Break Even Point
  • Strike Price + Premium Paid
  • Options Greeks Impact

    Time Decay Impact [Theta]
  • Time decay will erode premium and reduce the value of the PUT option
  • Time decay is harmful for the position
  • Volatility impact [Vega]
  • If volatility increases after you buy PUTs, then premium will go up
  • Trade Management & Exit

    Rolling & Adjustments
  • If volatility continues to exist, you can buy the next month PUT option.
  • Stop Loss
  • The downside is limited in this strategy and your downside is completely protected by the PUT
  • You can buy PUTs just for overnight protection and use STOP LOSS as a protective mechanism during the day to save some premium decay.
  • Exit
  • Evaluate the volatility levels of the stock and then exit the PUT option.