How to use the protective put calculator
The Protective put tool models shares plus a bought put:
- Shares owned, in multiples of 100, since one put contract covers 100 shares.
- Stock price. Your purchase price shows the result of the whole investment. Today’s price shows the protection from here, which is usually what you want when deciding whether to buy the put.
- Put strike and premium. The strike is the price you are guaranteed to be able to sell at; the premium is the ask price per share in the option chain.
- Days to expiry, used to annualize the cost, and an optional commission per contract.
The Collar tool adds a call you sell above the stock price, with its strike and premium. The results show the net cost after the call premium, the floor and the cap. Both tools draw the protected position against the shares alone and list the results at prices around the strikes.
The formulas
Break-even = S0 + Pp + Commissions ÷ Shares
Cost of protection = (Pp × Shares + Commissions) ÷ (S0 × Shares)
Annualized cost = Cost of protection × 365 ÷ DaysS0 is the stock price, Kp the put strike and Pp the put premium per share.
Maximum loss = (S0 − Kp) × Shares + Net cost
Maximum profit = (Kc − S0) × Shares − Net costKc is the call strike and Pc the call premium. A negative net cost is a net credit. All results are at expiry.
A worked example
You hold 200 shares of Company B at $72 and want protection through the next 90 days. You buy 2 puts with a $65 strike at $1.80 a share.
The protection costs $361.30, or 2.51% of the position, about 10.18% a year at that price. The stock can fall 9.72% to the strike before the put starts paying; below that, the loss stops growing. The maximum loss is $1,761.30, and the shares need to rise to $73.81 to cover the premium.
If the stock fell 30%, the shares alone would lose $4,320.00; with the put, the loss is $1,761.30.
Choosing the strike: a deductible
A protective put works like insurance with a deductible: the gap between the stock price and the strike is the part of the loss you keep. A lower strike means a bigger deductible and a cheaper premium. Using example premiums for three strikes:
| Put bought | Premium | Maximum loss | Break-even | Cost | Annualized |
|---|---|---|---|---|---|
| $60 strike | $0.85 | $2,571.30 | $72.86 | 1.19% | 4.82% |
| $65 strike | $1.80 | $1,761.30 | $73.81 | 2.51% | 10.18% |
| $70 strike | $3.40 | $1,081.30 | $75.41 | 4.73% | 19.19% |
The annualized column is what makes protection hard to keep up. Renewing a near-the-money put every three months can cost a large share of what the stock is likely to earn in a year. That is why many investors buy puts only for a specific risk, such as an earnings report or a period when they cannot sell, or choose a strike far enough below the price to protect against a crash rather than a dip.
Collars: paying for the put with a call
Selling a call above the stock price brings in a premium that pays for some or all of the put. In exchange, the shares are sold at the call strike if the stock finishes above it.
Adding a $80 call sold at $1.55 to the example put cuts the net cost to $52.60. Until expiry the position is boxed in: the floor is $65.00 a share and the cap is $80.00. The most you can lose falls to $1,452.60, and the most you can make is $1,547.40, a return of +10.71% if the shares are called away.
With a call premium equal to the put premium, the collar is “zero cost” apart from commissions. The cost has not disappeared; it has moved to the upside. The chart on the Collar tab shows all three choices: the shares alone, the shares with a put, and the collar, which gives up gains above the call strike in return for a cheaper floor.
Puts, stops and timing
A stop-loss order costs nothing to place, but it only becomes a market order when the price is hit. If a stock gaps down overnight, the order fills at the next available price, which can be far below the stop. A put guarantees the strike whatever the market does, until the day it expires. After that, the protection is gone unless you buy another, and the cost starts again.
Protection is also cheapest when it seems least needed. Put premiums rise with implied volatility, so buying puts after a sharp fall usually costs more than buying them in a calm market. The Black-Scholes calculator shows how strongly volatility drives the price.
What this calculator does not include
- Value before expiry. If you sell the put early, you receive its market value, which includes time value and depends on implied volatility.
- Dividends paid on the shares during the period, which add to the shares’ return.
- Taxes. In the US, buying a put on shares held for a year or less can reset their holding period, and a collar may be treated as a straddle for tax purposes. Check the tax effect before hedging shares with large unrealized gains.
- Early assignment of the short call in a collar, most likely just before an ex-dividend date.
- Bid-ask spreads, which make both legs of a collar cost more than the midpoint suggests.
For a covered call without the put, see the covered call calculator.