The married put is an option strategy where an investor buys an “at-the-money” put option while simultaneously buying an equivalent number of shares of the underlying stock.
The married put is an effective strategy to protect against depreciation in a stock’s price. From this article, investors will learn the basics of the married put and feel better prepared to use this strategy in their own option trading playbook.
This strategy would be used when an investor is bullish on a stock, but also has certain uncertainties about the stock in the near-future.
A married put has unlimited profit potential, as there is no ceiling on the price appreciation of the underlying stock. However, the profit potential from using this strategy is lower than it would be for just owning the stock. This is because of the premium paid when purchasing the put option.
An investor would incur the cost of the premium in order to protect his stock from downside risk. This strategy is known as a capital preserving strategy, rather than a profit-making strategy.
Let’s look at an example to gain a better understanding of this strategy.
Assume stock ABC is trading at $100. An investor establishes a married put position by purchasing shares of ABC at $100, while simultaneously purchasing a put option with a strike price of $97 that expires in a month. He purchases the put option for a premium of $3 per share.
The buyer’s maximum loss will occur if the stock falls to $97 or below at expiration. Assume ABC falls to $90. With the put option in place, the buyer can sell the shares of stock at $97. Therefore, his maximum loss is $6 per share. This is calculated from the stock’s sale price dropping from $100 to $97, which is a $3 loss, plus the premium paid which is a cost of $3.
If the stock price closed at $100 at expiration, then the buyer would only lose the cost of the premium, which was $3 per share.
The buyer’s maximum profit is uncapped. Suppose ABC went up to $105 at expiration. The buyer will profit $5 from the stock’s move from $100 to $105. After accounting for the cost of the put option, which was $3 per share, the buyer’s total profit becomes $2 per share.
Suppose ABC went up to $130 at expiration. From this, the buyer will profit $30 from the stock’s move from $100 to $130. After factoring in the cost of the put option, the buyer’s total profit becomes $27 per share. This shows how the buyer’s potential profit is uncapped and can continue to rise with the stock’s increase in price.
From these scenarios, investors should have a better understanding of the married put strategy. This is a great strategy to use when an investor wants to limit his losses but still have unlimited profit potential.