Cost of protection
Definition · Level 2 · Long options & hedges
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The premium paid for a hedge, often quoted as a % of the position per year; a certain drag on returns in exchange for a capped loss.
Example
A 3-month put costing 2% of the stock, rolled each quarter at a similar price ≈ 8% a year.
Where Tradecraft teaches it
Level 2 · Long options & hedges, in the lesson “Hedging stock you own or are short”: Protective puts, protective calls and covered puts: bolting an option onto a stock position.
Related terms
- Borrow feeThe annualized fee a short seller pays to borrow shares (and a lender earns); large on hard-to-borrow names.
- Covered PutThe mirror of a covered call: you are short 100 shares and sell a put below.
- DeductibleIn the insurance view of a protective put, the loss you absorb before protection starts: the distance from the current price down to the put strike.
- FloorThe lowest effective sale price a hedged holder can get, set by the strike of the put they own (before premium).
- Protective CallShort 100 shares and buy a call as insurance.
- Protective PutOwn 100 shares and buy a put. The put is an insurance policy: the strike is your floor, the distance to it is your deductible, the premium is the…