A protective put strategy is an options-based risk management technique used to protect an investment from a significant decline in value. It involves owning an underlying asset, such as shares of a stock or an exchange-traded fund, while simultaneously purchasing a put option on that same asset. The put gives the investor the right, but not the obligation, to sell the asset at a predetermined strike price before or at the option’s expiration date.

The main purpose of a protective put is to establish a floor under potential losses. For example, suppose an investor owns shares trading at $100 and purchases a put with a $90 strike price. If the stock falls sharply below $90, the put can increase in value and offset much of the decline in the shares. The investor therefore gains downside protection while continuing to own the stock.

The protection is not free. The investor must pay an option premium, which reduces the overall return if the stock rises or remains above the strike price. If the stock increases significantly, the investor can generally benefit from the share price appreciation, although the premium paid for the put lowers the net profit.

A protective put is often compared with insurance because the investor pays a known cost to reduce the potential impact of an unfavourable event. However, it does not eliminate every risk, and the amount of protection depends on factors such as the strike price, expiration date, premium, and market volatility.

Overall, a protective put can be useful for investors who want to maintain ownership of an asset while limiting their downside exposure during uncertain or volatile market conditions.