Protective put: How to hedge downside risk with options

A protective put pairs a long position with a put to cushion losses if the price falls. On Bybit, the Protective Put preset combines a long futures position with a long put. Depending on the selected contract, the futures leg can use USDT Perp, USDC Perp or USDT Futures. The put can offset some losses on the long leg if the underlying price falls. If the underlying rises, the futures position can still gain, less the put premium. Here’s how the hedge works and what to check before using it.

Key Takeaways:

• A protective put pairs long exposure with a put. Bybit’s preset pairs the put with a supported long futures position.

• For otherwise comparable puts, a higher strike generally provides more downside protection at a higher premium.

• The put settles separately and cannot stop the futures position from being liquidated earlier.

What is a protective put?

A traditional protective put has two legs:

• A long position in the underlying asset

• A put covering the same amount of the underlying

Bybit’s Protective Put preset uses the same basic idea, but pairs the put with a supported long futures position rather than Spot BTC.

For a matched hedge, the put and futures position should cover the same amount of the underlying. A smaller put leaves some exposure unhedged. The futures price can also differ from the index used to settle the put.

The put acts as the hedge. If the underlying is below the put strike at expiration, the put has intrinsic value and may provide a cash payout. That can offset some of the loss on the long futures position.

If the underlying rises, the long futures position can still gain. The put premium reduces that gain. It is the cost of protection against a larger fall.

Before the put expires, its market price can change with time, implied volatility and liquidity. The futures position also needs enough margin to stay open.

Choosing the strike and expiration for a protective put

The strike sets the level below which the put has intrinsic value at expiration. The expiration date tells you when that protection ends.

These are general patterns. The premium also reflects implied volatility, time remaining, rates and liquidity.

Choose an expiration date that covers the period you want to hedge. A shorter put may cover one event. A later expiry lasts longer and usually costs more. Available expiries may not match your timing exactly. If you use an expiry futures contract, also check its settlement date against the period you want to hedge.

Worked example: Protective put payoff at expiration

The worked example below uses a BTCUSDT Perpetual as the futures leg.

• Opens a long BTCUSDT Perpetual position of 1 BTC at a 100,000 USDT entry price

• Buys a put covering 1 BTC

• Uses a strike of 90,000 USDT

• Pays a premium of 3,000 USDT

• Keeps the Perpetual position open until the put expires

We measure the Perpetual’s profit and loss from its 100,000 USDT entry. For this example, we value it at the same BTC price used to settle the put. Fees, funding and price differences are left out. With the position fixed at 1 BTC, leverage does not change the price-based P&L in the table. It does affect margin needs and the risk of liquidation before expiration.

At expiration, the put's intrinsic value is:

Put intrinsic value = max(strike − settlement price, 0)

The combined profit or loss before fees is:

Long Perpetual P&L + put intrinsic value − premium

In this simplified example, the combined expiration P&L stays at −13,000 USDT once BTC falls to 90,000 USDT or below. That is the 10,000 USDT fall from the Perpetual entry to the put strike, plus the 3,000 USDT premium.

The example breaks even at 103,000 USDT before fees. A 3,000 USDT Perpetual gain then covers the put premium.

Above the strike, the put expires without intrinsic value. The long Perpetual position keeps its upside, less the premium and any trading costs.

Figure 1. Protective put at put expiration, before fees

The chart combines a 1 BTC long BTCUSDT Perpetual position with one matching put. It assumes the Perpetual stays open and uses the put’s settlement price. It excludes fees, funding, margin effects, liquidation and differences between Perpetual and index prices.

What happens when the put expires on Bybit

Bybit’s applicable crypto options are cash settled at expiration. If the put finishes in the money, it pays cash based on the final settlement price. No underlying asset changes hands through the put.

Settlement of the put does not automatically close the futures position. You must manage that leg separately, including its margin and any applicable contract-specific costs.

The put and futures position can be viewed together when judging the hedge. The BTCUSDT Perpetual example above assumes both use the same BTC price at put expiration. In live trading, the futures price and the option’s settlement index can differ.

If the underlying falls below the put strike, the cash payout can offset some futures losses. It arrives at option settlement, so it cannot stop earlier liquidation of the futures position.

The example excludes fees. Options trades may incur trading fees, while exercised options may also be subject to a delivery fee. Check Options Trading: Fees Explained for the latest rates and conditions.

Using a protective put on Bybit

The route depends on the market you want to trade. For crypto Options, start from Trade → Options. For Perp Options on TradFi assets, start from TradFi → Options. TradFi Perp Options currently use USDT Perpetual contracts as the underlying. The strategy setup is otherwise similar.

On the Bybit App, switch to Pro mode and open Strategies. Select Protective Put, then tap Trade Now. For crypto Options, the setup can combine a long USDT Perp, USDC Perp or USDT Futures position with a long put. For TradFi Perp Options, the long futures leg is a USDT Perp.

Choose the futures contract and option expiry, then set the leverage and position size for the futures leg. Select the put strike and quantity based on the futures exposure you want to hedge. Review the payoff and total margin before tapping Create Strategy to check both legs and confirm the order.

Make sure you have enough margin to maintain the futures position. If you adjust the leverage, note that the change applies to all positions and active orders for the current pair.



Benefits and risks of a protective put

The put creates a floor for the combined expiration P&L in our example while leaving room for gains if BTC rises. That −13,000 USDT floor assumes both legs stay open and are valued at the same BTC price.

Protection costs money. The premium reduces your return even if the put expires without a payout. Before expiration, time decay and changes in implied volatility can move the put’s price.

Fees, bid/ask spreads and slippage can add to the cost. A size mismatch leaves part of the futures position exposed. Funding, where applicable, and differences between the futures price and the option’s settlement index can affect the combined result.

The put cannot stop the futures position from being liquidated before expiration. Once the put expires, continued protection means buying another option and paying another premium.

The bottom line

A put can help cushion losses on a long futures position if the market falls, while leaving room for gains if the underlying rises. The strike and expiration shape the protection, and the premium is what you pay for it.

The payoff chart above assumes the BTCUSDT Perpetual remains open until the put expires. Margin and liquidation risk still apply before then. Explore the available contracts on Bybit Options where supported.

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