Put Spread Hedge
A put spread hedge buys a put and sells a lower put to protect at a lower cost. Learn how it cuts the price of protection in exchange for a floor on the coverage.
A put spread hedge protects a position by buying a put and selling a further out-of-the-money put below it. The sold put lowers the cost of the protection, in exchange for capping how far down the hedge covers. It is insurance with a deductible ceiling.
It is a cheaper alternative to a plain protective put, built from a bear put spread. Let me show you the bargain and its catch.
Cheaper Protection, With a Limit
A protective put covers you all the way down, but that full coverage is expensive. A put spread hedge trims the cost by selling a lower put and using its premium to offset the put you buy.
The result is a protected band rather than an open-ended floor. You are covered from the upper put's strike down to the lower put's strike. Beyond that lower strike, the protection stops, because your sold put starts canceling your bought put. You accepted a limit on how deep the coverage goes, and in return you paid much less for it.
Watch It Work
You own 100 shares of Apple at $200 and want cheaper protection than a full put. You build a put spread hedge:
- Buy a $190 put for $4 a share
- Sell a $170 put for $1.50 a share
- Net cost: $2.50 a share, or $250, versus $400 for the put alone
You are now protected between $190 and $170.
Apple falls to $175. You are inside the protected band. The hedge cushions the drop just as a plain put would, and it cost you less to own.
Apple crashes to $150. Here the limit bites. Your protection maxed out at $170, so below that your sold put offsets your bought put and you are exposed to further losses again. A deep crash is exactly where a put spread hedge falls short.
Apple rises to $220. Both puts expire worthless. You keep the gains and paid only the small net premium, less than the plain put would have cost.
The Trade-Off
A put spread hedge is a bet about how bad the drop will be, and that bet defines its strengths and weaknesses.
The appeal is a lower cost. By selling the lower put, you cut the premium significantly, which reduces the drag on your returns when no crash comes. For hedging against a moderate pullback, it is efficient.
The catch is capped protection. If the market truly collapses through your lower strike, you are unprotected below it, precisely when you would want the coverage most. So a put spread hedge suits a view that a decline will be limited, not catastrophic. When you fear a genuine crash, a plain protective put or a tail risk hedge is the safer choice.
- A put spread hedge buys a put and sells a lower put.
- It cuts the cost of protection using the sold put's premium.
- Coverage is limited to the band between the strikes.
- It suits a moderate pullback, not a deep crash.
Pop Quiz
Three quick questions to see what stuck. Pick an answer and the explanation shows up right away.
How does a put spread hedge lower its cost?
The sold lower put brings in premium that offsets the cost of the put you buy, cutting the price.
What is the catch of a put spread hedge?
Below the sold put's strike, the coverage runs out, leaving you exposed in a deep crash.
When does a put spread hedge fit best?
Its capped coverage suits a limited decline. For a true crash, a plain put or tail hedge is safer.
Bottom Line
A put spread hedge is protection at a discount. Buy a put, sell a lower one, and the coverage costs far less, covering a band of downside rather than an open-ended floor. It is an efficient guard against a moderate slip.
The trade-off is that the safety net has a hole below the lower strike. If a real crash punches through, you are exposed again just when it hurts most. Use it when you expect a limited decline, and reach for fuller protection when you fear the worst.
Keep going: the full-coverage version is the protective put, the structure underneath is the bear put spread, and the crash-only version is the tail risk hedge.