A protective put lets you keep all your shares, retain all upside, and set a defined floor on losses, without triggering a taxable sale.
A zero-cost collar eliminates the put's out-of-pocket cost by selling a covered call, but it caps your upside at the call strike.
The three most common reasons to avoid selling: tax friction on a low-basis position, conviction in the stock, and insider or lockup restrictions on selling.
Protection costs money. For a high-volatility tech stock, a one-year 10% out-of-the-money put might cost roughly 5% to 10% of position value (illustrative). That is the price of keeping the stock while avoiding catastrophic loss.
Why selling is not always the answer
The standard financial-planning answer to concentrated-stock risk is simple: sell and diversify. For many people, it is the right answer. But three real obstacles stop a large number of equity-comp holders.
Tax friction
If you received RSUs that have appreciated significantly, or exercised options years ago at a low strike price, your cost basis may be a small fraction of today's market value. A sale triggers long-term capital gains at 15% to 20% federally, plus state taxes (which can add another 9% to 13% in high-tax states), plus the Net Investment Income Tax for high earners.
On a $2 million position with a $200,000 basis, that tax bill can exceed $400,000. Many holders are unwilling to take that hit, particularly when they believe the stock will continue to grow.
Conviction
Many equity-comp holders work at the company whose stock they hold. They understand the business, believe in it, and genuinely expect the stock to be higher in three to five years. Selling means giving up that return.
Conviction is not irrational. But it is also not a substitute for downside protection. The history of equity markets contains many examples of excellent companies whose stocks fell 50% or more, often temporarily, often before recovering. The holders who were forced to sell at the bottom because they had no protection lost wealth they never recovered.
Lockup and insider restrictions
Officers, directors, and large shareholders may be subject to lockup periods, trading windows, pre-clearance requirements, or SEC Rule 144 volume limitations. Even when they want to sell, they may not be legally able to do so without significant planning and a waiting period.
Protective options can generally be placed on restricted shares, but only with proper legal review. Consult your company's legal counsel and a securities attorney before hedging any position subject to insider trading restrictions.
Protective put: the floor without the exit
A protective put is the most direct way to protect gains without selling. You buy a put option on the shares you hold. The put gives you the right to sell at the strike price through expiration. You are not obligated to sell; you simply have the option to do so.
If the stock falls below the strike, the put gains intrinsic value that offsets your loss. If the stock rises, you keep all the gain. The put expires worthless, and you lose only the premium, which was the cost of your insurance.
What a protective put looks like: you own 1,000 shares of a stock at $100. You buy a one-year put with a strike of $90, paying illustratively $7 per share ($7,000 total premium). Your floor is now $90 minus the $7 premium paid, or roughly $83 effective floor on your entry. If the stock falls to $60, your put pays $30 per share. If it rises to $140, you made $40 per share on the stock and lost $7 on the put.
This example is illustrative only. Actual put prices depend on live market conditions, implied volatility, and time to expiration.
Zero-cost collar: reduce cost by capping upside
The premium on a protective put can feel like a significant cost, particularly on a high-volatility stock. A collar solves this by adding a covered call to the position.
You sell a call option at a higher strike price. The premium you receive from selling the call offsets some or all of the premium you paid for the put. When structured to net near zero, it is called a zero-cost collar.
The trade-off: if the stock rises above the call strike, you are obligated to sell (or deliver) shares at that price, giving up gains above the cap. If the call strike is above your current price by 15%, you still participate in modest appreciation, but a major rally would be capped.
For a complete comparison of puts, collars, and variable prepaid forwards, see the VPF vs collar vs put guide.
Side-by-side: protective put vs collar vs doing nothing
| Factor | Do nothing | Protective put | Zero-cost collar |
|---|---|---|---|
| Upfront cost | Zero | Put premium (illustrative: 5%–10%/yr for volatile stocks) | Near zero (call premium offsets put premium) |
| Downside floor? | No. Full loss exposure. | Yes: floor at put strike | Yes: floor at put strike |
| Upside retained? | All of it | All of it | Capped at call strike |
| Triggers taxable sale? | No | No (but tax treatment of put itself is complex) | No (but constructive-sale risk exists for tight collars) |
| Works during lockup? | N/A | Potentially, with legal review | Potentially, with legal review |
| Scenario: stock falls 40% | Lose 40% | Lose ~10%–15% (floor + premium) | Lose ~10%–15% (floor + premium) |
| Scenario: stock rises 40% | Gain 40% | Gain ~30%–35% (upside minus premium) | Gain capped at call strike (illustrative: 10%–20%) |
Illustrative scenarios only. Actual outcomes depend on specific strike, premium, and market conditions.
What protection costs over time
The honest framing: buying a put every year is a recurring cost, like insurance. Over five years of protecting a position, the total put premiums paid can be meaningful.
A holder who pays 7% per year for protection over five years has spent 35% of their position's original value on premiums (illustrative). Whether that is worth it depends on what happens to the stock and on the holder's ability to absorb a large loss if they had gone unhedged.
Some strategies reduce the recurring cost: buying further out-of-the-money puts (higher deductible), using longer-dated LEAPS that are cheaper per month, and buying collars to eliminate or reduce the net premium. The cost-of-hedging guide covers these cost levers in detail.
Tools to model your specific situation
Before deciding whether to hedge and at what level, use the BallastX Stress Test to see what a 30%, 50%, or 70% drawdown in your position would cost your net worth. That context often clarifies whether the cost of protection is worth it.
The BallastX Hedging Cost Index shows current annualized put-cost benchmarks for equity-compensation stocks. It lets you compare what protection costs today versus historical levels.
The concentration diagnostic maps your overall exposure across holdings and shows your beta, sector concentration, and what historical market crashes would have done to your specific portfolio.
Frequently asked questions
Yes. A protective put gives you the right to sell at a set price without obligating you to do so. You keep the shares and all future upside. The put pays off if the stock falls below the strike. A zero-cost collar also protects without selling, though it caps your upside in exchange for eliminating the put's out-of-pocket cost.
Three main reasons: tax (selling a large low-basis position triggers capital-gains tax that can consume 20% to 30%+ of the gain), conviction (they believe in the stock's future and do not want to exit), and legal constraints (insiders and employees under lockup agreements often cannot sell freely even if they want to).
Buying a stand-alone protective put generally does not trigger a constructive sale of the underlying shares. However, the tax treatment of the put itself (the premium paid, and gains or losses when the put is exercised, sold, or expires) is complex and depends on several factors including holding periods. Consult a tax professional before using options on a low-basis concentrated position.
If you hold the stock and own a put, your maximum loss is the gap between your purchase price and the put strike, plus the premium paid. The put prevents losses below the strike. If the stock falls 40% and your put strike is 10% below the current price, you lose approximately the first 10% of decline plus the premium; the put covers the remaining 30% drop.
It depends on the stock's implied volatility, your chosen strike, and the tenor. As an illustrative range: a one-year put at 90% of the current price on a tech stock with moderate-to-high volatility might cost 5% to 10% of the position's notional value. Stable, lower-volatility stocks cost less. See the BallastX Hedging Cost Index for current benchmarks on equity-compensation names.
Yes, a collar provides downside protection without selling the underlying shares. By selling a covered call, you offset the put cost. The trade-off: you give up gains above the call strike. If the stock rises above the call, your shares may be called away, which is effectively a forced sale at the call strike. Whether that triggers a constructive-sale tax event depends on the specific structure; consult a tax professional.