How a Put Protects You

Here's a concrete example of portfolio insurance in action:

You own shares of a stock trading at $100. You buy a put option with a $90 strike price for $3 per share. What happens next depends on the market:

• Stock drops to $70: Your shares lost $30 each, but your put lets you sell at $90. Net loss: just $13 instead of $30
• Stock stays at $100: Your put expires worthless. You lost the $3 premium — that's the cost of insurance
• Stock rises to $120: Same thing — you're up $20 minus the $3 premium

The premium is your maximum cost. The protection is your guaranteed floor. That's the trade-off every insurance product makes.