Protective Put

Q: How much does a protective put cost?

It depends on strike, expiry and implied volatility. A Nifty 23,500 put with 30 days left and IV near 13%, bought against exposure at 24,000, costs about ₹124 per unit, ₹8,060 per 65-unit lot, or 0.52% of the position for a month. Closer strikes and higher volatility cost more.

Q: What is the floor on a protective put?

The strike minus the premium paid. In the example, 23,500 minus 124 gives a floor of 23,376, so the maximum loss on the hedged position is 24,000 minus 23,376, or 624 points per unit, ₹40,560 per lot, no matter how far Nifty falls.

Q: Is a protective put better than a stop loss?

It is a different instrument. A stop loss is free but executes at the next available price after a gap, so it can fill far below the intended level. A protective put costs a premium but guarantees the floor regardless of gaps. Many holders use puts around events and stops in ordinary conditions.

Q: What happens to a protective put at expiry on NSE?

An index put that is in the money is exercised automatically and pays the intrinsic value in cash; out of the money it lapses. A stock put in the money delivers the shares at the strike, which suits a hedger who holds them. The underlying position is unchanged either way.

A stop-loss can be gapped through. A put cannot. The protective put is the only hedge that holds when the market opens 3% lower.

In short: a protective put is a long put held against a long position in the underlying (shares, an index fund, or a long futures position). Below the strike the put’s gains offset the position’s losses, creating a floor at the strike minus the premium paid; above it the position keeps its upside less the premium. It is insurance: the cost is certain, the payout conditional.

The intuition

Owning shares and worrying about a fall leaves two choices: sell, and give up the upside; or hold, and take the downside. A put splits the difference. It is the right to sell at a fixed price, so holding it alongside the shares guarantees a selling price no matter how far the market drops, while the shares remain free to rise. The cost is the premium, paid upfront, gone whether or not the fall arrives, which is exactly how insurance works.

The strike is the deductible. A put struck close to the current price insures almost everything and costs the most; a put struck well below insures only a crash and is cheap. The expiry is the policy term. Most of the craft is in choosing both so that the premium does not quietly consume the returns being protected.

Formula

Value at expiry = underlying price + max(strike − underlying price, 0) − premium paid

Floor = strike − premium; break-even = entry price + premium

Maximum loss = entry price − strike + premium, per unit; upside unlimited, reduced by the premium

The combined position has the Greeks of the underlying plus the put: delta between zero and one, positive gamma, negative theta (the insurance decays), positive vega.

Worked example (illustrative numbers)

Suppose an investor holds Nifty exposure equivalent to 65 units at 24,000, worth ₹15,60,000, through an index fund, and buys one lot of the 23,500 put with 30 days to expiry for ₹124, paying ₹8,060. The floor is 23,500 − 124 = 23,376.

Nifty at expiry	Unhedged P&L	Put payout	Hedged P&L (net of ₹8,060)
25,000	+₹65,000	0	+₹56,940
24,124	+₹8,060	0	0 (break-even)
23,500	−₹32,500	0	−₹40,560 (maximum loss)
22,500	−₹97,500	₹65,000	−₹40,560
21,000	−₹1,95,000	₹1,62,500	−₹40,560

The cost is 0.52% of the position for a month of cover, and the worst case is capped at 2.6%. Buying the 23,800 put instead would cost about ₹215 (₹13,975) and raise the floor to 23,585; buying the 23,500 put every month for a year would cost roughly 6% of the position in premiums if volatility stays near 13%, which is why continuous full insurance is rarely worth it and most hedgers buy cover around specific events.

The protective put turns an open-ended loss into a flat floor. The vertical gap between the lines above the strike is the premium.

Why it matters to an options trader

It is the hedge behind put open interest. A large part of index put OI below the market is protective buying by portfolio holders, which is why put implied volatility runs above call IV at equal distances: the skew is the price of insurance demand.
It holds through gaps. A stop-loss order executes at the next available price after a gap; a put’s floor is contractual.
Strike and expiry are the whole decision. A 0.25-delta put a month out is the common compromise between cost and cover; event hedges use the nearest expiry after the event.
It converts to a collar cheaply. Selling a call above the market funds part or all of the put, at the cost of capping the upside.

Common mistakes

Buying protection after the fall. Implied volatility is highest then; the same put costs two or three times more than it did a week earlier.
Rolling full cover every month. Annual premiums of 6% or more consume most of the expected return of the asset being protected.
Mismatching size. One Nifty lot is 65 units, about ₹15.6 lakh at 24,000; a ₹10 lakh portfolio hedged with one lot is over-insured and net short.
Hedging a stock portfolio with index puts and expecting a full offset. The portfolio’s beta and its stock-specific moves leave a residual.
Holding an ITM stock put through expiry without the shares. On NSE it delivers; see the next section.

Indian-market specifics

Index puts (Nifty, Bank Nifty, FinNifty, Sensex) are European and cash-settled: at expiry an in-the-money put pays its intrinsic value in cash on T+1, with STT of 0.15% on the intrinsic value charged to the holder (from 1 April 2026).
Stock puts are physically settled: a long in-the-money stock put at expiry delivers the shares at the strike, which is precisely what a holder of the shares wants, but a hedger without the shares in demat faces a short delivery.
Expiries: Nifty weekly and monthly on Tuesday, giving a choice of short-dated cover for events; Bank Nifty and FinNifty monthly on the last Tuesday; Sensex weekly on Thursday. Lot sizes: Nifty 65, Bank Nifty 30, FinNifty 60, Sensex 20.
A long put needs no margin; the premium is paid in full. SPAN gives a margin offset when the put is held against a long futures position in the same underlying.

FAQ

How much does a protective put cost?

About 0.5% of the position per month in the example; more for closer strikes.

What is the floor on a protective put?

Strike minus premium: 23,376 in the example.

Is a protective put better than a stop loss?

A put guarantees the floor through gaps; a stop does not, but costs nothing.

What happens to a protective put at expiry on NSE?

Index puts pay cash; stock puts deliver shares; the position stays.

Price the hedge before the event

The protective put strategy page walks through strike and expiry choice with payoff tables. In the app, the Option Chain page shows put premiums and implied volatility by strike, and the Calendars page shows the expiries around upcoming events.

Protective put strategy page Hedging with options guide

Related terms

Put Option, the instrument
Covered Call, the other half of a collar
Volatility Skew, why puts cost more than calls
Hedge Ratio, sizing the cover