The strategy is to buy an at-the-money put option while on the same day buying the same number of shares of the underlying stock. An investor then is protecting shares owned from a drop in stock price.
With a married put, the premium one pays is very much like an insurance policy; one has a dreaded feeling, with no certitude, that the stock might take a dive in the near future. This is unlike other put buyers who have more basis or evidence for speculating that the stock will fall.
Break-Even Point, Maximum Profit, and Maximum Loss
- Break-Even Point: Stock purchase price + premium paid
- Maximum Profit: In theory, unlimited, since the stock can rise indefinitely
- Maximum Loss: Limited. Equals the stock purchase price + premium paid – strike price, since the investor can sell the put at the strike price. However, this guaranteed maximum loss is only good until expiration of the put; past this time limit, when the put expires, ones protection on the downside no longer exists.
Example of a Married Put: Lincoln National Corp.
Say an investor buys 200 shares of Lincoln National Corp. at $23 per share. On the same day, with the current month being February, one buys two contracts (200 shares), an April 21 Put at $.50. The premium paid then costs an investor $100 (.50 x 200). One has then paid out $4700 (4600 for the stock, and 100 for the premium).
A profit is made when the stock rises above the bought stock price + the premium paid. So, if the stock rises to $25, one will have made a profit of $300 (200 x 25) – 4700, and one can forget about the put option since it will expire worthless.
In likelihood that the put expires in-the-money (when the stock price falls below the strike price at which it can be sold) an investor can exercise his right to sell his shares at the put’s strike price. This scenario would be applicable, say, if the stock dropped to $19. One’s loss would then equal $500 (200 x [(23+.50) – 21)]
Suppose, however, an investor opted to merely buy the stock, and did not engage in a married put. The usefulness of a married put options strategy is now plain, as one’s loss would now be much greater. Assume once again that the stock falls to $19. The loss would equal: $800; 200x (23-19), an increased loss of $300.
Also, prior to expiration, an investor can opt to sell the put, if it has market value. This may serve to offset the loss in the underlying stock, and the premium paid.
Bruce Silver - Bruce Silver has been an investor in stocks and stock options since high school. As he says" I prefer to trade calls; I am an optimistic ...
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