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Protective Put Definition
Protective put definition for Series 7 candidates, with hedge example, breakeven logic, common mistakes, and options practice links.
Know the term before it appears in a question.
Terms connect to examples, common mistakes, and the practice page where the rule gets tested.
Definition snapshot
Exam trap notes
Practice links
Definition snapshot
Protective Put
A protective put combines long stock with a long put on the same stock. The put gives the investor a floor by allowing the stock to be sold at the strike price.
Why it matters
Why it matters on the Series 7
The exam commonly tests protective puts as downside protection for a customer who wants to keep stock ownership but limit loss below a stated level.
Example
See the rule in a prompt.
A customer owns stock at 50 and buys a 50 put for 3. The put protects the stock below 50, but the premium raises the breakeven to 53.
Common mistakes
What candidates confuse
- Forgetting that buying protection costs premium and raises breakeven.
- Confusing a protective put with a covered call income strategy.
- Treating the hedge as eliminating all risk, including premium cost.
Exam depth
How to study this page
What the exam is testing
The exam commonly tests protective puts as downside protection for a customer who wants to keep stock ownership but limit loss below a stated level.Why candidates miss it
Forgetting that buying protection costs premium and raises breakeven.Exam trap
Confusing a protective put with a covered call income strategy.Memory trick
Before answering, say the tested rule in one sentence, then point to the exact clue in the stem. For protective put, the clue usually appears before the answer choices start to look tempting.Related concepts
Concept map
Use this map to move from the definition into the related rule, chapter, or practice page where the term changes an answer.