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In This Article
- What is a Married Put?
- Example of a Married Put
- How to Use a Married Put Options Strategy
- What is the Maximum Profit Potential of a Married Put?
- What is the Maximum Loss Potential of a Married Put?
- What is the Breakeven Point of a Married Put?
- When to Use the Married Puts Options Strategy
- When to Not Use the Married Puts Options Strategy
- The Bottom Line: Married Puts
With so many options trading strategies out there, how can you choose which one is best for you?
By taking a deep dive into their advantages and disadvantages — or, in another words, growing your education.
Did you know there is one option trading strategy that offers investors protection against downside risk while still providing upside potential?
It’s true — married puts allow the trader to continue holding the stock even if it falls sharply in value.
In this article, we’ll break down everything you need to know about married puts, including their advantages, disadvantages, breakeven point, and more.
If you're ready to learn everything you need to know about married puts, let's get started.
What is a Married Put?
A married put is an options trading strategy in which the trader buys both a put option and the underlying stock.
The put option provides insurance against the stock falling below a certain price, while the purchase of the stock covers any upside potential.
The trade is said to be "married" because the two positions are purchased at the same time and offset each other's risk.
Advantages of a Married Put
The key advantage of married puts is that the options strategy allows the trader to continue holding the stock even if it falls sharply in value.
This gives traders the chance to recover their losses and still profit from any future rebound in the stock price.
While it does require the trader to pay for the put option, this cost is typically more than offset by the savings from not having to sell the stock at a loss.
Disadvantages of a Married Put
There are a few drawbacks to Married Puts that should be considered before entering into a trade.
- Married puts can be expensive because you're effectively buying two different contracts — the put option and the underlying asset.
- Your upside is limited by the strike price of your put option. So if the stock skyrockets, you won't be able to fully participate in those gains because you have to factor in the money lost on the put option.
- Married puts can be complicated to construct and may require special permission from your broker.
Example of a Married Put
Let’s look at a quick example of a married put in which you would purchase 100 shares of ABC Stock at $30 per share ($3,000 total).
You also buy a put option at a strike price of $25 for $1.00 ($100 total).
This provides you insurance for 100 shares since each option contract represents 100 shares of stock.
If the stock price drops to $20 per share, the $10 per share loss of the stock is offset by the $5 per share profit of the option contract.
If the stock price goes up to $40, your net gain is $10 of profit per share ($1,000 total net profit), minus the $100 you spent on the insurance provided by the put option.
How to Use a Married Put Options Strategy
The key to successful use of this strategy is to choose the right put option.
The put's strike price should be set at a level that would be considered a reasonable entry point for the stock.
For example, if the stock is currently trading at $100 per share, then a strike price of $95 would be a reasonable choice.
The expiration date of the option should also be considered.
If the trader expects the price of the stock to fall quickly, then a shorter-term option would be ideal.
However, if the trader anticipates that it may take some time for the price to decline, then a longer-term option would be more appropriate.
The premium paid for the put option should also be taken into consideration.
Remember that you're essentially buying insurance against a decline in the stock price; as such, it will cost you money every month in premiums.
The premium will vary based on factors such as the strike price and expiration date of the option, as well as the current market conditions.
By carefully considering all these factors, traders can use a married put options trading strategy to their advantage.
What is the Maximum Profit Potential of a Married Put?
The maximum profit potential of a married put is limited to the price of the stock, minus the premium paid for the option.
That is why it is important to be mindful of how much you are paying for the premium.
The more you pay for premiums, the more you reduce your potential profit if the market moves in the direction you expect.
Finding the right balance is essential.
What is the Maximum Loss Potential of a Married Put?
The maximum loss potential using a married put option strategy is the difference between the price you paid for the stock and the strike price of the put option you purchased as insurance.
The stock price could fall to zero and you would still have the right to exercise your option and sell your share for the strike price at which you purchased the put option.
For example, if the stock price was $100 and the strike price of the put option was $95, your maximum loss would be $5 per share, no matter what the price of the underlying asset actually falls to.
What is the Breakeven Point of a Married Put?
For a married put, the breakeven point is the purchase price of the stock, plus the premium paid when the put option was purchased. For example, if the stock was $100 per share and you buy a put with a strike price of $95 for $5 per share, your breakeven point would be $105 per share ($100 strike price + $5 premium).
When to Use the Married Puts Options Strategy
Married puts are often used by investors who are bullish on a stock but are concerned about near-term market volatility.
By buying a put option, they can protect their downside while still being able to participate in any upside potential.
This makes married puts an attractive strategy for many investors.
When to Not Use the Married Puts Options Strategy
There are a few scenarios where the married puts options strategy might not be the best choice.
- If you expect the underlying asset to experience a sharp decline in value, buying puts may not provide enough protection.
- If you're only planning on holding the asset for a short period of time, buying puts could tie up too much of your capital.
- If the stock price is volatile, it may be difficult to find a put with a strike price that provides adequate protection.
- If you're worried about missing out on the potential upside, buying puts may not be the right move.
Of course, there are always exceptions to these rules — it all depends on your specific circumstances and investment goals.
But in general, these are a few times when you might want to steer clear of the married puts strategy.
The Bottom Line: Married Puts
Overall, the married put options trading strategy is a good way to protect yourself against a decline in the stock price while still being able to benefit from any upside potential.
Married puts offer a balance of risks and rewards that can be attractive to investors who are bullish on an asset but concerned about potential downside risks.
These options are a great way to trade when you understand the risks and rewards associated with them.
They can be used as part of a diversified trading strategy, but should only be employed by traders who understand when and how they work best.
That’s why it’s critical to continually grow your options trading education. By doing so, you can maximize your profit while minimizing your risk.