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.