Hedge Calculator

How the math works

Each put contract normally covers 100 shares. At expiry, a put is worth the strike minus the stock price if the stock is below the strike, and nothing otherwise. So below the strike, every dollar the shares lose is made back by the put. The hedge costs the premium you paid, whatever happens. A collar adds a sold call: above the call strike, every dollar the shares gain is owed on the call, which caps your gain, and the call premium you received lowers the cost.

The table measures each result from today's price. "Protection starts below" is the price under which the hedged position loses less than the unhedged one would have.

When a hedge is worth it

A put is insurance. Bought every quarter, the premiums can add up to several percent a year, which is a heavy drag on long-run returns. Hedges make the most sense for a specific risk over a specific period: a big position you cannot sell yet, an earnings report, money you will need soon. Our guide to hedging a stock portfolio compares puts and collars with cheaper alternatives such as diversification and smaller positions.

Examples

The default numbers. 200 shares at $50 ($10,000), with $45 puts bought for $1.50 a share ($300). If the stock falls to $30, the shares lose $4,000, the puts pay $3,000, and the total loss is $1,300 instead of $4,000. If the stock rises to $60, you make $2,000 on the shares and keep $1,700 after the premium.

A collar. Add a $57.50 call sold for $1.50. The hedge now costs nothing, but above $57.50 your gain stops: at $70 you make $1,500 instead of $4,000. Executives with large stakes often use collars like this to protect wealth tied up in their company's stock.

Explain it like I'm 13

A put is like phone insurance. You pay a little every month. If you drop the phone in a lake, the insurance pays for most of a new one. If you never drop it, you paid for nothing, but you slept better. A collar is insurance you pay for by promising to give away part of any lucky windfall.

Questions

What is a protective put?

A put option you buy on a stock you own. It gives you the right to sell at the strike price until expiry, so your loss below that price is limited to the gap plus what you paid for the put.

What is a collar?

A protective put paid for, partly or fully, by selling a call option above the current price. It limits your loss and also caps your gain.

Where do I find a put's price?

Your broker's option chain shows the bid and ask for each strike and expiry. Use the ask price, the price you would pay, as the premium here.

Does this include commissions and taxes?

No. It shows the result at expiry before costs. Options can also be exercised or sold before expiry, which this does not model.