How to Hedge Your Portfolio with a Protective Put Option

A protective put option can help protect your investment portfolio from a stock market decline.

What if you have a strong hunch that the stock market is about to drop? Should you sell all your stocks? No. But buying a protective put option can be a sensible strategy when a stock market decline appears imminent.

Selling all your stocks is risky. After all, your stocks might go up after you sell. Then you’d lose out. But with a protective put, you retain upside potential if stocks go up.

Moreover, selling your stocks could trigger adverse tax consequences if you have significant gains in your portfolio. A protective put has tax advantages relative to liquidating stocks.

Watch the video below and talk with the pros at Successful Portfolios – Parker, David, or Joe. Our advisors know the ins and outs of trading put and call options, protecting profits, and managing risk and return. They’d be happy to help you.

Now download and read Characteristics and Risks of Standardized Options.

Protective Put Option Payoff Diagram

Think of a protective put option as a form of portfolio insurance. A long put creates a floor under the price of an asset, be it your portfolio or a single stock. Put options on $SPY, the SPDR S&P 500 ETF are an excellent vehicle to hedge a portfolio with high correlation to the S&P 500 Index.

Speculative Long Put

A speculative long put option is a simple wager that a stock not owned by the put buyer will decline.