250  •   The Intelligent Option Investor
The graphic conventions are a little different, but both diagrams show 
the acceptance of a narrow band of downside exposure offset by a bound-
less gain of upside exposure. The area below the protective put’s strike price 
shows that economic exposure has been neutralized, and the area below 
the ITM call shows no economic exposure. The pictures are slightly differ-
ent, but the economic impact is the same.
The objective of a protective put is obvious—allow yourself the 
economic benefits from gaining upside exposure while shielding yourself 
from the economic harm of accepting downside exposure. The problem is 
that this protection comes at a price. I will provide more infromation about 
this in the next section.
Execution
Everyone understands the concept of protective puts—it’s just like the 
home insurance you buy every year to insure your property against dam-
age. If you buy an OTM protective put (let’s say one struck at 90 percent of 
the current market price of the stock), the exposed amount from the stock 
price down to the put strike can be thought of as your “deductible” on your 
home insurance policy. The premium you pay for your put option can be 
thought of as the “premium” you pay on your home insurance policy.
Okay—let’s go shopping for stock insurance. Apple (AAPL) is trad-
ing for $452.53 today, so I’ll price both ATM and OTM put insurance for 
these shares with an expiration of 261 days in the future. I’ll also annualize 
that rate.
Strike ($) “Deductible” ($) “Premium” ($)
Premium as 
Percent of 
Stock Price
Annualized 
Premium (%)
450 2.53 40.95 9.1 12.9
405 47.53 20.70 4.6 6.5
360 92.53 8.80 1.9 2.7
Now, given these rates and assuming that you are insuring a $500,000 
house, the following table shows what equivalent deductibles, annual 
premiums, and total liability to a home owner would be for deductibles 
equivalent to the strike prices I’ve picked for Apple: