Strota / Protective Put — Insurance for a Long Portfolio

Protective Put — Insurance for a Long Portfolio

Own the stock + buy a put against it. Caps downside at strike - premium. The classic 'I want to keep this stock but limit downside' play.

Build a protective put →

Protective put = own the stock + buy a put against it. Sets a floor on your downside. The put pays off if the stock crashes, offsetting the stock's loss.

Effectively, you're buying insurance. Like all insurance, expect to lose the premium most of the time — the payoff comes in the rare crash scenarios.

Worked example — ICICI BANK

You own 1 lot of ICICI BANK at ₹1,100 (lot size 700, so 700 shares = ₹7,70,000 position). Earnings coming in 2 weeks.

Buy 1,050 PE (5% OTM) at ₹15. Cost = ₹15 × 700 = ₹10,500 (1.4% of position).

If ICICI crashes to ₹950 on bad earnings: stock loss = ₹150 × 700 = ₹1,05,000. Put payoff = (1,050 - 950) × 700 - ₹10,500 = ₹59,500. Net loss = ₹45,500 instead of ₹1,05,000.

If ICICI doesn't crash: put expires worthless, you lose ₹10,500 in premium. Cost of the insurance.

When to buy protective puts

Before known event risk. Earnings, regulatory decisions, election cycles where the underlying stock could move sharply.

After large unrealised gains. Lock in some of the gain while keeping upside open.

For positions too large to comfortably sit through volatility. A 1.5% premium cost can buy peace of mind for a position that might otherwise force-sell on small drawdowns.

Strike selection cost trade-off

ATM put (most expensive): No downside from strike, but premium is 2-4% of underlying. Rarely worth it.

3-5% OTM (most common): Cost typically 0.8-1.5% of underlying per month. Reasonable insurance level.

7-10% OTM (cheap tail): Cost 0.3-0.6% of underlying. Only kicks in on major crashes — pure tail hedge.

What to do with this: Don't treat protective puts as constant insurance. They cost premium every month. Use them tactically before known event risk, not as a default position. Carrying puts perpetually erodes returns substantially over multi-year horizons.

Common misreads

Buying protective puts continuously regardless of regime. The premium erodes long-term returns significantly.
Choosing strikes too close to spot. ATM puts cost too much — typical retail hedge uses 3-5% OTM strikes.
Forgetting that the put expires. Insurance doesn't auto-renew — you have to roll it if you want to maintain protection.

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Ratio Spread

Key takeaways

Own stock + buy put. Caps downside at (strike - premium).
Premium is an insurance cost — paid every period, regardless of outcome.
Best deployed tactically before known event risk.
Cost: typically 0.5-1.5% of underlying per month.

Protective put — practical

Better to sell the stock or buy a protective put?

Sell if you've lost conviction. Protect put if you want to keep the upside while limiting downside. Selling has no ongoing cost; protective puts have a monthly premium drain.

Can I hedge a portfolio of stocks with NIFTY puts?

Yes — buy NIFTY OTM puts sized to roughly match your portfolio's beta-adjusted exposure. Cheaper than buying puts on each individual stock and protects against broad-market drops.

When does the put pay off?

At expiry, if the underlying is below the strike. Before expiry, the put has some value (intrinsic + time value), so closing it before expiry on a partial drawdown captures some of the gain.

Married put vs protective put?

Same trade — different terminology. 'Married put' is the older retail term; 'protective put' is the more common name today. Both mean own-stock + own-put.

Is the premium paid tax-deductible?

Options losses are generally treated as business income/loss for active traders or capital losses for occasional traders. Consult a CA for your situation, but the offsetting effect exists either way.