Married Put Explained

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Married Put

The Married Put is an option strategy in which the options trader buys an at-the-money put option while simultaneously buying an equivalent number of shares of the underlying stock.

Married Put Construction
Long 100 Shares
Buy 1 ATM Put

A married put strategy is usually employed when the options trader is bullish on a stock, wants the benefits of stock ownership (dividends, voting rights, etc.), but wary of uncertainties in the near term.

Unlimited Profit Potential

As its profit potential is the same as a long call’s, the married put is also known as a synthetic long call.

The formula for calculating profit is given below:

  • Maximum Profit = Unlimited
  • Profit Achieved When Price of Underlying > Purchase Price of Underlying + Premium Paid
  • Profit = Price of Underlying – Purchase Price of Underlying – Premium Paid

Limited Risk

The formula for calculating maximum loss is given below:

  • Max Loss = Premium Paid + Commissions Paid
  • Max Loss Occurs When Price of Underlying

Breakeven Point(s)

The underlier price at which break-even is achieved for the married put position can be calculated using the following formula.

  • Breakeven Point = Purchase Price of Underlying + Premium Paid

Example

An options trader is very bullish on XYZ stock but worried about near term uncertainties. He establishes a married put position by purchasing shares of XYZ stock trading at $52 in June while simultaneously buying SEP 50 put options trading at $2 to protect his share purchase.

Maximum loss occurs when the stock price dive to $50 or below at expiration. With the SEP 50 puts in place, even if the stock price dive to $30, he will still be able to sell his holdings for $50. Therefore, his maximum loss is limited $2 in paper loss + $2 in premium paid for the options = $4.

On the upside, there is no limit to the profits should the stock price head north. Suppose the stock price goes up to $70, his profit will be $18 in paper gain less $2 paid for the put protection = $16.

However, if the stock price remain unchanged at expiration, he will still lose $2 in premium paid for the put insurance.

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Note: While we have covered the use of this strategy with reference to stock options, the married put is equally applicable using ETF options, index options as well as options on futures.

Commissions

For ease of understanding, the calculations depicted in the above examples did not take into account commission charges as they are relatively small amounts (typically around $10 to $20) and varies across option brokerages.

However, for active traders, commissions can eat up a sizable portion of their profits in the long run. If you trade options actively, it is wise to look for a low commissions broker. Traders who trade large number of contracts in each trade should check out OptionsHouse.com as they offer a low fee of only $0.15 per contract (+$4.95 per trade).

Similar Strategies

The following strategies are similar to the married put in that they are also bullish strategies that have unlimited profit potential and limited risk.

Married Put

What Is a Married Put?

A married put is the name given to an options trading strategy where an investor, holding a long position in a stock, purchases an at-the-money put option on the same stock to protect against depreciation in the stock’s price.

The benefit is that the investor can lose a small but limited amount of money on the stock in the worst scenario, yet still participates in any gains from price appreciation. The downside is that the put option costs a premium and it is usually significant.

A married put may be contrasted with a covered call.

Key Takeaways

  • This option strategy protects an investor from drastic drops in the price of the underlying stock.
  • The cost of the option can make this strategy prohibitive.
  • Put options vary in price depending on the volatility of the underlying stock.
  • The strategy might work well for low-volatility stocks where investors are worried about a surprise announcement that would drastically change the price.

NYIF Instructor Series: Married Put

How a Married Put Works

A married put works similarly to an insurance policy for investors. It is a bullish strategy used when the investor is concerned about potential near-term uncertainties in the stock. By owning the stock with a protective put option, the investor still receives the benefits of stock ownership, such as receiving dividends and having the right to vote. In contrast, just owning a call option, while equally as bullish as owning the stock, does not confer the same benefits of stock ownership.

Both a married put and a long call have the same unlimited profit potential, as there is no ceiling on the price appreciation of the underlying stock. However, profit is always lower than it would be for just owning the stock, decreased by the cost or premium of the put option purchased. Reaching breakeven for the strategy occurs when the underlying stock rises by the amount of the options premium paid. Anything above that amount is profit.

The benefit of a married put is that there is now a floor under the stock limiting downside risk. The floor is the difference between the price of the underlying stock, at the time of the purchase of the married put, and the strike price of the put. Put another way, at the time of the purchase of the option, if the underlying stock traded exactly at the strike price, the loss for the strategy is capped at exactly the price paid for the option.

A married put is also considered a synthetic long call, since it has the same profit profile. The strategy has a similarity to buying a regular call option (without the underlying stock) because the same dynamic is true for both: limited loss, unlimited potential for profit. The difference between these strategies is simply how much less capital is required in simply buying a long call.

Married Put Example

Let’s say a trader chooses to buy 100 shares of XYZ stock for $20 per share and one XYZ $17.50 put for $0.50 (100 shares x $0.50 = $50). With this combination, they have purchased a stock position with a cost of $20/share but have also bought a form of insurance to protect themselves in case the stock declines below $17.50 before the put’s expiration. For a put to be considered “married,” the put and the stock must be bought on the same day, and the trader must instruct their broker that the stock they have just purchased will be delivered if the put is exercised.

When to Use a Married Put

Rather than a profit-making strategy, a married put is a capital-preserving strategy. Indeed, the cost of the put portion of the strategy becomes a built-in cost. The put price reduces the profitability of the strategy, assuming the underlying stock moves higher, by the cost of the option. Therefore, investors should use a married put as an insurance policy against near-term uncertainty in an otherwise bullish stock, or as protection against an unforeseen price breakdown.

Newer investors benefit from knowing that their losses in the stock are limited. This can give them confidence as they learn more about different investing strategies. Of course, this protection comes at a cost, which includes the price of the option, commissions, and possibly other fees.

Married Put Explained

Married or Protective puts are helpful when you want to protect the profits made from a stock, but do not want to sell it as of now to lock in the profits.

Married or Protective puts are also helpful when you bought shares and fear that the stock value may fall – but for some reason you do not want to sell the stock. Married puts will help in case the stock actually falls.

Here is a graph of married puts. If stock falls below “A” the protective puts will save the investor from losses in the stock.

Let me now explain in details.

You hold quite a lot of shares of a company and some bad news comes in about the company or about equities in general and you fear that your shares’ value may now tank. What do you do? You have two options:

1. Sell the shares at a loss, or
2. Buy ATM/OTM put of the same company.

Option 1 is pretty easy, but mostly you will lose money. Remember markets get the news before retail investors like us get. So even before you can trade, the markets will price the shares of the company you own at appropriate levels which almost always means you will be at a loss or may be breaking even (if you bought the shares at a great price.)

Even if you are not in a loss, one thing is pretty sure you lost a great amount of profits that you could have made had you sold the shares when they were at a higher level. Unfortunately greed came in and you kept it on hold. �� Well don’t worry, it happens with everyone. Nothing to feel guilty about it. If you are still in profit, my advice is that you should get out, and re-enter at a lower levels. The problem is how on earth you know if it will ever go more down and where to re-enter?

Timing the market is extremely difficult if not impossible. (Actually impossible, but they say nothing is impossible so ��

You can however protect further downside of the stock by a simple strategy called married puts. Which takes us to the second option. Buy ATM/OTM put of the same company.

Note: Married puts are useful if you have a lot at stake in that particular stock, at least 2-3 lakhs or equivalent to its leverage in futures and options. For example right at the time of writing this article HDFC Bank is trading at Rs. 588.00 and let us suppose you bought 500 shares of HDFC Bank at 590.00. So your total investment is 500*590 = Rs. 295,000.00. The markets are falling – especially the banking sector. You fear that HDFC Bank may also fall and so you may suffer a loss, but you want to hold the stock and don’t want to sell right now and not lose money too.

You can then buy a put option of HDFC Bank to protect your losses from the downfall. Now if HDFC Bank falls, you need not worry as the put you bought will also increase in value and you can sell it at an appropriate level to realize a profit. Now your buying cost of HDFC Bank will come down due to this profit.

Three things can happen when in a married put strategy:


1. Prices moves down:
You profit from the put bought. Your cost of buying the stock comes down.
2. Prices remain at the same level: Put expires worthless. You lose the premium paid to buy it. (Worst situation.)
3. Prices move up: You profit on the stocks bought. However you lose money on the puts bought. If prices move beyond the breakeven point you will make money. The premium paid to buy the puts should be added to the cost of buying stock. This is your breakeven point. Anything beyond that is your profit.

Great. But what is the risk?

The risk is if HDFC Bank shares stays at the same level or move up. The worst situation is when they stay at the same level. Your puts will expire worthless and you will lose whatever you paid as premium to buy them. If the shares move up, you will gain some from the up move but your puts will get lower in value as the stock price moves upwards. But after your breakeven points you should be in profits.

When is a married put helpful?

You should go for married put when you are certain that the stock price of the company you hold shares in will fall in value. And you should also know the maximum risk you are wiling to take. To make married puts work its best, it is best to buy ATM or just OTM puts. If you buy too far OTM puts they may be cheap but will not increase in value fast and may actually expire worthless even if the share price drops. This will be a double whammy. You lose money in shares and you will also lose money you invested in puts as well. As in joke they will become divorced puts. �� Rather your expression will be ��

Yes taking a married put decision can bring rewards, but the risk is definitely there. You may ask why not sell futures of the same company when the stock price is going down.

Yes you may be right. Yes there are no premiums to pay and the cash also comes from the collateral from the same shares. You can use your collateral to buy options as well but at least you know your max loss when buying options. In futures you have no idea as it can be unlimited loss, so using collateral money in not a good idea.

Selling future is a better option if the stock price stays there or goes down. However what happens if there is some good news and the stock opens gap up the next day morning? You will make money in stocks you hold, but lose the same amount of money in the future. Your buying cost of the stock will go up. Unfortunately you will have to pay this as MTM (mark to margin) and if you don’t have cash your broker may sell some of your shares to pay for the losses you incurred in the future. Not a good situation to be in.

With married puts you know exactly how much you are going to lose. And if your view was wrong you may actually sell the put and restrict your losses.

It is your call, but experts always say married puts not married futures. So there is something to it.

Important Note: If you are not sure of the movement or if you think there will not be a significant drop in the share value do not attempt a married put. You may lose the premium you paid.

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