Chapter 03 · Combining option positions
A put bought against a holding
A put bought against shares you own is a floor for a period you choose, paid for with a premium that is gone if you do not need the floor. This chapter prices the floor and compares it with simply selling the shares.
What you are buying
You hold 300 shares at ₹420. The put lot is 300. You buy a one-month put with a strike of ₹400 and pay ₹8 a share, ₹2,400 for the lot. You have bought the right to sell at ₹400. If the shares are above ₹400 at expiry and you still believe in them, the put expires and the ₹2,400 is the cost of having had a floor you did not use. If the shares fall to ₹350, the put is worth about ₹50 a share at expiry, or ₹15,000, which offsets a large part of the ₹70 fall from ₹420.
| Share price at expiry | Shares versus ₹420 | Put versus the ₹8 paid | Combined versus ₹420 |
|---|---|---|---|
| ₹450 | +₹30 | −₹8 | +₹22. The floor was unused. |
| ₹400 | −₹20 | −₹8 | −₹28. You are at the strike and the premium is lost. |
| ₹350 | −₹70 | +₹42 roughly (−8 + 50) | −₹28. Further falls below 400 are the put’s gain, offsetting the shares. |
| ₹300 | −₹120 | +₹92 roughly | −₹28. The combined loss stays near the distance from 420 down to 400, plus the premium. |
The combined loss, once the shares are below the strike, stops growing. That is the product. The maximum loss versus the original ₹420 is about ₹20 on the shares down to the strike, plus ₹8 of premium, so about ₹28 a share, until you include charges. Above the strike you still have the full upside, minus the premium you paid. You did not cap the gain. You paid rent for a floor.
Why the strike and the expiry are the whole decision
A put at ₹420, struck at your purchase price, costs more than a put at ₹400, because it starts protecting sooner. A put three months out costs more than a put one month out, because the right lasts longer. There is no correct pair. There is only a pair whose premium you can pay without it being so large that the floor costs more than the loss you were willing to accept. If an ₹8 premium on a ₹420 share feels painful, notice that it is about 1.9% for a month. Paying 1.9% a month, every month, is a very expensive habit. Paying it once, ahead of an event you can name, is a different decision.
Compared with selling the shares
Selling the shares removes the risk and also removes the chance of a recovery, and it may have tax consequences you should compute separately. Buying the put keeps the shares, keeps the recovery, and spends the premium. If you already know you do not want the shares at ₹350, selling is the cleaner instrument. If you want them for the next two years and you are uneasy about the next month, the put is a rental of courage with a posted price. Do not buy the put and then also sell the shares in a panic. You would have paid for a floor and then declined to stand on it, which is the cost without the product.
What to remember
- A protective put caps the downside below the strike and leaves the upside in place, minus the premium.
- The unused floor still costs the premium. That cost is the point, not a failure.
- Closer strikes and longer expiries cost more because they are better floors.
- Repeating a monthly put forever is a large annual drag. One put in front of a named event is a smaller decision.
- If you do not want the shares at all, sell them. Do not rent a floor for a position you have already abandoned.