11.39Protective Put
1What is it?
Own the stock and buy a put on it.
2Why does it exist?
When it is used: You want to keep your shares but insure against a big fall (e.g. before results).
3Diagram
Max profit
Unlimited
Max loss
₹35,000
Breakeven
₹1,520
4Calculation
- Own 500 shares at ₹1,500; buy 1,450 PE at ₹20 → cost ₹10,000.
- Stock crashes to ₹1,200 → loss capped at ₹35,000 (without the put: ₹1,50,000).
- Stock rises to ₹1,700 → profit = ₹1,00,000 − ₹10,000 = ₹90,000.
- Maximum profit: Unlimited upside (minus premium)
- Maximum loss: (Stock cost − put strike + premium) × qty = (50 + 20) × 500 = ₹35,000
- Breakeven: Stock cost + premium = ₹1,520
5Risks
- Limited-risk position: the most you can lose is known in advance.
- Premiums shown are hypothetical; real premiums depend on volatility and time to expiry.
6Quick revision
- Max profit: Unlimited upside (minus premium)
- Max loss: (Stock cost − put strike + premium) × qty = (50 + 20) × 500 = ₹35,000
- Breakeven: Stock cost + premium = ₹1,520
7Knowledge check
Q1. Why buy a protective put?Show answer
To cap downside on shares you own.
Q2. Cost of protection?Show answer
The put premium.
Q3. Breakeven?Show answer
Stock cost plus premium.
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