We'll also touch on how other asset classes, like gold, can be protected in a similar manner through put options.

More information on the features, benefits and risks of options is available at the ASX Options knowledge hub.
 

Understanding put options

Put options are financial instruments that give the holder the right, but not the obligation, to sell a specified amount of an underlying asset at a predetermined price (the strike price) within a specified time frame. 

This strategy is somewhat similar to buying ’insurance’ for a share portfolio. Just as people pay a premium to protect their home or car, investors pay a premium for put options to safeguard the value of their share investments.
 

Current market highs and recent volatility

On 12 February 2026, the Australian stockmarket traded near record highs at 9,050 points and experienced heightened volatility. 

These fluctuations in the S&P/ASX 200 index reflected broader economic, and geopolitical uncertainties, among other factors.

The S&P/ASX 200 Index is the benchmark for the Australian stockmarket and includes the top 200 companies listed. 

The level of the index is crucial when considering put options, as it influences the cost of the options.
 

Alternative put options with a six-month expiry date

When selecting put options, investors can choose different strike prices and expiry dates. 

This article considers protection strategies with a six-month expiry date.

Investors can opt for put options with strike prices that are:

1. At-the-Money (ATM): these options have a strike price close to the current index level. They offer a balanced approach, providing protection at a lower cost.
   
   
2. In-the-Money (ITM): these options have a strike price below the current index level. They are more expensive but offer greater protection.
   
   
3. Out-of-the-Money (OTM): these options have a strike price above the current index level. They are cheaper but provide less protection.

The closer the strike price is to the current index level, the higher the premium investors will pay for the put option. This is because the likelihood of the option being exercised increases as the strike price approaches the current index level.

Continuing the analogy to the purchase of home or car insurance, when you purchase a zero-excess policy, the costs are greater (as is an ATM Option) than insurance policies with excesses that must be paid when making a claim under the insurance policy. In that sense, the insurance policy’s excess is like a put option with strike prices that are below (OTM Option) being cheaper or above (ITM Option) being more expensive in respect to the current index level. 

The following table shows the current market costs for protection using S&P/ASX 200 Index options as a percentage of portfolio value.

Source: ASX

The greater the excess, the more investors lose until their protection kicks in if the sharemarket falls.
 

How many options are needed to protect your portfolio?

S&P/ASX 200 index option contracts are worth $10 per point. If the protection level chosen is 9,000 points, one contract represents $90,000 of market exposure.

For a portfolio worth around $900,000, 10 index options would need to be purchased (through the premium paid). A $450,000 portfolio equals five contracts; a $90,000 portfolio equals one contract and so on.

What happens after 6 months (at expiry)

Assume six months have passed. Depending on the level of the S&P/ASX 200 Index at the time, investors will have two choices:

1. The S&P/ASX 200 Index has fallen below the put option strike level

• Exercise the right (claim the 'insurance') - the options market will pay back in cash the difference between the investor’s  strike price and the prevailing index level. For example, if an investor purchased an 8,600 strike put option and the index has fallen to 8,000 points – they will receive $6,000 per options contract held (600 point index fall multiplied by the $10 per point the contract is worth). There is no need to sell any shares. The money earned from the options contract should offset their losses in the sharemarket if their portfolio trends the same as the S&P/ASX 200 index.

2. The S&P/ASX 200 Index has remained steady or rallied above the strike level

• The options expire worthless - there is no option to claim 'insurance'.  If the market has remained steady or rallied above the strike level, the options will expire without an ability to claim (i.e. at the time of expiration, the option will be worthless). This means that the costs of the premium will have been paid without any return. However, by continuing to hold the shares, dividends may have been paid and the value of the shares will have remained steady or increased.

Risks and considerations

While put options can provide a safety net for an investor's portfolio, it's important to understand the risks involved:

1. Imperfect hedge: if the portfolio doesn't move in line with the S&P/ASX 200 index, an investor may not achieve a perfect 'hedge' (an action that reduces or offsets potential financial risk). This means that while the put options may protect against a decline in the index, they may not fully offset losses in your specific holdings.
   
   
2. Cost of protection: buying a put option requires paying a premium upfront. This premium is the cost of the protection and is payable regardless of whether the option is exercised. The premium can reduce overall returns if the option expires without value, so investors need to weigh this upfront cost against the potential benefit of downside protection.
   
   
3. Market timing: the outcome of a put option depends on market movements during the life of the contract. If the market remains stable or rises, the option may expire worthless. In that case, the investor does not recover the premium paid, and the upfront cost of the protection reduces overall portfolio returns.

Protecting other asset classes

Put options are not limited to equities. Other asset classes, such as gold, can also be protected using options. 

For example, an investor can purchase put options on gold Exchange Traded Funds (ETFs) to hedge against a potential decline in gold prices. 

This strategy works similarly to protecting a portfolio of shares, providing a safety net in volatile markets. 

Like all investment products, ETFs have risks. More information on the features, benefits and risks of ETFs is available here.

Conclusion

Using put options to protect a portfolio of shares is a strategy to manage risk. 

By understanding the current S&P/ASX 200 index levels, selecting appropriate put options with a six-month expiry date, and using tools on the ASX website to expand their options knowledge, investors may be able to better safeguard their investments. 

However, it's essential to consider the costs and risks associated with this strategy and to recognise that it may not provide a perfect hedge.