How Much Does It Cost to Hedge a Portfolio?
Reviewed by Leon Moyer - Published October 9, 2026 - Last reviewed October 9, 2026
In this lesson
Estimate the yearly cost of keeping a put hedge in place, compare roll schedules, and decide what to do with a hedge after the market falls.
The cost of hedging a portfolio with puts is the premium you pay for protection that, in most periods, expires unused, and measured over a year it is the total spent on keeping the hedge in place, net of anything recovered by selling puts before they expire.
In this lesson's model, keeping a put 10% below the market in place for a year costs roughly 4% to 5% of the portfolio, depending on how the hedge is rolled. That is a large drag next to what a portfolio earns in an ordinary year, which is why the decision to hedge is mostly a decision about cost. The figures below come from the same Black-Scholes pricing model as the free OptionsPro profit calculator, so you can reproduce them there.
The examples use XYZ, a hypothetical index fund at $100, and a $100,000 portfolio hedged with 10 XYZ 90 puts. Prices are model values at 26% implied volatility and a 4.5% interest rate, assuming XYZ stays at $100 unless stated. At those inputs the 90-day 90 put is worth about $1.22, the premium used throughout this module, including in How to Hedge a Portfolio With Index Puts. Figures below use the unrounded model value, so 10 puts show as $1,217 rather than $1,220.
Why does a hedge cost money every day?
An option's price has two parts. Intrinsic value is what it would be worth if exercised now; for a put, the strike minus the price, or zero. Time value is everything else: the value of the chance that the price moves before expiration. A put 10% below the market is all time value. Every day that passes without a fall, some of that time value disappears. This is called time decay, or theta.
What the 90 put is worth as time passes, if XYZ stays at $100
Value of 10 puts
With XYZ steady at $100, the 10 puts lose about $490 of value over their first 30 days, about $500 over the next 30, and are worth only about $225 with a month left. The last month adds little protection: by then, XYZ would need to fall more than 10% within weeks for the puts to finish in the money. That is why many hedgers roll a put before its final month rather than holding it to expiration.
What does it cost to keep a hedge in place for a year?
To compare hedges with different lifetimes, put them on the same footing. In one sentence: yearly cost = (price paid - price recovered when sold) x 365 ÷ days held.
Worked example
Three ways to keep 10 XYZ 90 puts in place for a year
XYZ stays at $100 all year and implied volatility stays at 26%. Each time a put is replaced, the new one is again the 90 strike.
- Buy 90-day puts and hold each to expiration: each set costs about $1,217 and expires worthless, about four times a year. Yearly cost: $1,217 x 365 ÷ 90 = about $4,936, or 4.9% of the portfolio.
- Buy a one-year put and hold it: about $4,194 for the year, or 4.2%.
- Buy a one-year put and sell it with 90 days left: pay about $4,194, recover about $1,217 after 275 days. Yearly cost: ($4,194 - $1,217) x 365 ÷ 275 = about $3,951, or 4.0%.
Illustrative and hypothetical. The ticker and prices are invented for teaching, and the figures exclude commissions, fees, margin interest and taxes, which reduce real results. Past or hypothetical outcomes do not indicate future results.
The yearly cost of keeping the 90 put in place, three ways
Cost per year
In this flat-market model, the longer-dated put costs less per year of protection, because an option's time value grows more slowly than the time it covers. Real markets complicate the picture. Longer-dated options often trade at a different implied volatility from short-dated ones, and a one-year put bought in a calm market may sit far from the market after a big rally. The method still holds: compute the yearly cost of each schedule with real quotes before choosing one.
How do you keep the cost of a hedge down?
- Move the strike further down. A cheaper, deeper deductible, as in the strike comparison in How to Hedge a Portfolio With Index Puts.
- Sell something against it. A put spread or collar, covered in Put Spreads and Collars, trades protection or upside for a lower cost than the same put bought alone.
- Set a budget. Some hedgers decide in advance what share of the portfolio they will spend on protection each year and buy only what that budget covers.
- Hedge only part of the portfolio. Five contracts instead of ten halve the cost and halve the protection.
- Hold less stock. Moving part of the portfolio to cash or bonds cuts tail risk with no option premium at all, at the cost of lower expected returns.
What should you do with a hedge after the market falls?
A hedge that has worked raises a new question: keep it, or cash it in? Before expiration, a put's value reflects both its intrinsic value and its remaining time value, and in a sell-off implied volatility usually rises, which lifts the time value further.
After a drop: what the hedge is worth before expiration
10 XYZ 90 puts
A month after buying the 10 puts for about $1,217, XYZ has fallen to $85 with 60 days left. The puts' intrinsic value is $5,000. At 26% implied volatility they are worth about $6,233; if implied volatility has risen to 35%, about $7,398.
Neither choice is free:
- Sell the puts (monetize the hedge). You lock in the gain, which offsets part of the portfolio's $15,000 loss, and you can buy new, lower-strike protection with some of the proceeds. If the market keeps falling, you have less protection than before.
- Keep the puts. You stay protected if the fall continues. If the market rebounds or implied volatility drops back, much of the gain can disappear.
Many hedgers set a rule in advance, for example to sell when a put's value reaches a multiple of what they paid, so the decision is not made in the middle of a panic.
Check your understanding
You buy a 90-day put for $1,200 and sell it 60 days later for $300. What is the yearly cost of that schedule?
Show answer
About $5,475: ($1,200 - $300) x 365 ÷ 60 days held.
Why does a put 10% below the market add little protection in its last month?
Show answer
With only weeks left, the market would need to fall more than 10% very quickly for the put to finish in the money, so most of its value, and most of the protection, is already gone.
After a sell-off, why can a put be worth more than its intrinsic value?
Show answer
It still has time value, the chance of a further fall before expiration, and implied volatility usually rises in a sell-off, which increases that time value.
Key takeaways
- The cost of a hedge is the premium that expires unused, and in most periods that is all of it.
- Yearly cost = (price paid - price recovered) x 365 ÷ days held, which lets you compare roll schedules.
- In a flat-market model, longer-dated puts cost less per year than repeatedly buying short-dated ones; real implied volatilities can change that.
- Out-of-the-money puts lose most of their value before the final month, which is why many hedgers roll early.
- After a drop, selling the puts locks in the gain; holding them keeps the protection and the risk of giving the gain back.
Common questions
How much does it cost to hedge a portfolio with puts?
It depends on the strike, the time to expiration and implied volatility. In this lesson's model, keeping a put 10% below the market in place for a year cost roughly 4% to 5% of the portfolio. Real costs vary widely with market conditions.
Why do portfolio hedges lose money most of the time?
A put loses time value every day it is held, and in most periods the market does not fall far enough for the put to finish in the money. The premium is the price of protection that is usually not needed.
When should you roll a protective put?
Many hedgers roll before the last month, because a put that is out of the money loses most of its remaining value and protection then. Some roll on a fixed schedule, others when the market moves far from the strike.
Should you sell your puts after the market drops?
Selling locks in the gain, which can offset part of the portfolio's loss or fund new protection. Holding keeps the protection in place if the fall continues, but the gain can shrink if the market rebounds or implied volatility falls.