The Cost of Protection

Options aren't free, and the price follows a logical pattern. The premium depends on three main factors: time until expiration (more time = higher cost), strike price distance (closer to current price = more expensive), and volatility (scarier markets = pricier insurance).

A portfolio hedge usually costs a small percentage of its value each year in premiums. So in a year when the market rises 15%, you'd capture a little less than that. You're trading a small slice of upside for peace of mind during downturns.