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Protective puts use stock-linked puts to hedge downside risk
A protective put works by buying a put option on shares you already own, so the option gains value when the stock falls and can offset losses without selling the stock.
Yahoo Finance explains that a protective put is an options strategy where an investor buys a put option for a stock position they already hold, aiming to act as downside insurance during potential downturns.
The guide notes that one standard options contract controls 100 shares, so investors typically buy a matching number of contracts based on how many shares they own, for example one contract for 100 shares and five contracts for 500 shares.
It also describes the economics of the hedge, including the premium paid upfront to buy the put, which is nonrefundable regardless of market performance.
According to the article, when the stock price drops below the strike price, the put can increase in value, and investors can either sell the contract to offset stock losses or exercise it to sell 100 shares at the agreed strike price.