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Married Puts - Introduction
Married Puts is an option trading hedging strategy used
in conjunction with stocks in order to produce a convex position with unlimited profit potential but limited maximum loss.
Married Puts are very similar to Protectives Puts
except that the stock and the puts are executed at the same time in Married Puts, hence "Married".
Married Puts tranforms a stock position, which is a position that can go down to zero, into a convex position which has unlimited topside
but a limited loss! Yes, it is like putting on an insurance on your position right from the onset.
Married Puts differ from Protective Puts in the timing and purpose of execution. Protective Puts is an option trading strategy executed in order
to protect the profits of existing stock holdings. It is executed AFTER your stocks have moved up and have profited. Married Puts is executed
the moment you buy new stocks so that immediately, those stocks have a limited loss potential. So you "marry" the stock and the put options right
from the start.
You could also create the same profit/loss profile as Married Puts using only a fraction of the money involved in the Married Puts by using
another option trading strategy known as the Fiduciary Calls.
Which also means that Married Puts creates synthetic long calls.
When To Use Married Puts?
You would use Married Puts to set up stock positions with limited maximum loss.
Example : Assuming you bought 100 shares of QQQQ at $40 on 1 Jan and you want your position to not suffer a reduction in value should QQQQ drop suddenly.
How To Use Married Puts?
Married Puts is a simple option trading strategy where you simply buy to open 1 contract of at the money put options for every 100 shares that you buy.
Folllowing Up On The Previous Example : You would buy to open
1 contract (equivalent to 100 shares) of $40 Put Options expiring a few months later (e.g March40Put for $0.80).
Trading Level Required For Married Put
A Level 1 options trading account that allows the execution of Covered Calls and Protective Puts is needed for the Married Put. Read more about Options Account Trading Levels.
Profit Potential of Married Puts :
Married Puts is an option trading hedging strategy which, combined with the underlying stock, grants unlimited maximum profit as long as the underlying
stock continues to rise.
Profit Calculation of Married Puts :
The cost of the Put Options are expensed against the rise in price of the underlying stock when calculating profits.
Profit = (stock price - put strike price - cost of put) x number of shares
Following up from the above example:
Assuming QQQQ rises to $60 by the expiration of the March50Put.
Profit = ($60 - $40 - $0.80) x 100 = $1920
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Risk / Reward of Married Puts:
Upside Maximum Profit: Unlimited
Maximum Loss: Limited
Break Even Point of Married Puts:
Because you incur a cost on the put options, the underlying stock needs to rise to cover that cost. The breakeven
point is the point beyond which the Married Puts position would start to profit.
Breakeven = Initial stock price + cost of put options bought.
Following up from the above example:
Breakeven = $40 + $0.80 = $40.80
Advantages Of Married Puts:
Allows you to hold on to your stocks while insuring against any losses.
Allows you to quickly transform the position into a Synthetic Straddle in order to profit from both up and down moves.
Disadvantages Of Married Puts:
Cost of the put options eats into profit margin.
Alternate Actions for Married Puts Before Expiration :
1. If the underlying stock continues to rally strongly, one could sell the
out of the money put options and then buy at the money put
options in order to re-establish the position as a Protective Put
at the higher price.
2. If the underlying stock drops strongly, one should continue to hold the Married Puts position all the way to expiration.
Alternate Actions for Married Puts During Expiration :
1. During expiration, if the put options are in the money
due to a drop in the underlying stock, you could sell the put options on expiration day and then use the profits made to buy more of the underlying stock
in preparation for a rebound, effectively compounding your profits.
2. During expiration, if the put options are out of the money due to the underlying stock rising, one should simply let the put options
expire worthless rather than incurring costs by selling them. Transaction costs is one of the devils of option trading.
Questions about Married Puts:
Why Not OTM Puts For Married Put?