Protective Put

An options contract gives its holder a right — not an obligation — to buy or sell a security at a predetermined price (the strike price) before or on a specified expiration date. A put option specifically grants the right to sell. When purchased on a position the investor already holds, it functions like insurance: if the security's market price falls below the strike price, the investor can exercise the put and sell at the higher protected price, or sell the now-valuable put itself to offset losses on the underlying holding.

For substantial families, protective puts are sometimes considered when a single position represents an uncomfortably large share of net worth and an outright sale is undesirable — perhaps because of tax consequences, contractual lock-ups, or ongoing business relationships. Consider a hypothetical family business founder who cannot sell shares for a defined period after a transaction; a protective put could limit the downside during that window without triggering a sale.

The primary cost is the option premium paid upfront, which is lost entirely if the stock never falls below the strike price — analogous to paying for insurance that goes unused. Protective puts are one component of the broader collar strategy, where that premium cost may be partially offset by simultaneously selling a call. Because options strategies carry complex tax and regulatory considerations, a qualified attorney, CPA, and licensed derivatives professional should be involved in any evaluation. Families can explore related concepts at hedging and collars.