Protective Put: Insurance for Your Stocks
A protective put is the simplest hedging strategy. You own shares of a stock (or Nifty futures) and buy a put option to protect against downside. If the stock crashes, the put option increases in value, offsetting your loss. If the stock goes up, you lose only the premium paid for the put.
Think of it like car insurance: you pay a premium every month hoping you never need it. But if an accident happens, the insurance saves you from catastrophic loss.
How It Works on Nifty (Step by Step)
- You hold 1 lot of Nifty futures (25 units) bought at 25,400
- You buy 1 lot of 25,200 PE (Put option, 200 points below current price) for Rs 60 premium
- Total cost of protection: Rs 60 × 25 = Rs 1,500
Scenario A: Nifty rises to 25,800 (+400 points)
Your futures profit: 400 × 25 = Rs 10,000. Put expires worthless: -Rs 1,500. Net profit: Rs 8,500. You kept most of the upside.
Scenario B: Nifty crashes to 24,800 (-600 points)
Your futures loss: -600 × 25 = -Rs 15,000. But your 25,200 PE is now worth Rs 400 (25,200 - 24,800). Put profit: (400 - 60) × 25 = Rs 8,500. Net loss: -Rs 6,500 instead of -Rs 15,000. The put saved you Rs 8,500.
Scenario C: Nifty stays flat at 25,400
Futures P&L: Rs 0. Put expires worthless: -Rs 1,500. Net loss: -Rs 1,500. This is the cost of insurance.
When to Use Protective Puts
- Before budget/RBI policy: You're long Nifty and don't want to close the position, but you know a 200-500 point move is possible. Buy a protective put 1-2 days before the event. Cost: Rs 2,000-5,000 for 1 lot. Peace of mind: priceless.
- Holding delivery stocks through earnings: You own 100 shares of Reliance (Rs 2,800 each = Rs 2.8 lakh). Earnings tomorrow. Buy Reliance 2,700 PE for Rs 30 (Rs 3,000 total). If Reliance drops to Rs 2,500, your put saves you Rs 17,000.
- Weekend risk on futures: Holding Nifty futures over the weekend with global uncertainty. Buy a cheap OTM put on Friday for gap-down protection on Monday.
Protective Put vs Stop-Loss: Which Is Better?
| Factor | Protective Put | Stop-Loss Order |
|---|---|---|
| Cost | Premium (Rs 1,500-5,000) | Free |
| Gap protection | Yes (works even with 500pt gap) | No (SL triggers at gap price, not your level) |
| Position maintained | Yes (you keep the stock/future) | No (position closes) |
| Best for | Events, overnight, weekends | Normal intraday trading |
Use protective puts for event risk. Use stop-losses for regular trading. The put costs money but handles the scenarios that stop-losses can't — gap openings, circuit limits, and flash crashes.
Choosing the Right Strike and Expiry
- Strike: Buy 2-5% OTM (out of the money). For Nifty at 25,400, buy 25,200 PE (1.5% OTM) or 24,900 PE (2% OTM). Deeper OTM = cheaper premium but less protection.
- Expiry: Match to your holding period. Protecting through budget (1 day)? Buy the current weekly. Protecting through earnings season (2 weeks)? Buy the monthly expiry.
- IV matters: If Sensibull shows IV Percentile above 80%, puts are expensive (everyone is hedging). Consider a put spread instead: buy 25,200 PE, sell 25,000 PE. Costs 40% less, still protects for the first 200 points of drop.
For more options strategies including straddles and strangles, see our dedicated volatility trading guide.