Key Takeaways
- Buy stock and protective put option simultaneously.
- Limits downside risk while keeping unlimited upside.
- Costs include stock price plus put premium.
- Acts like insurance against stock price drops.
What is Married Put?
A married put, also known as a protective put, is a bullish options strategy where you buy shares of a stock and simultaneously purchase an equivalent number of at-the-money put options. This approach limits your downside risk while preserving unlimited upside potential.
This strategy acts like insurance, protecting your long stock position from significant losses without sacrificing dividend benefits or voting rights.
Key Characteristics
Married puts combine stock ownership with downside protection through options. Key features include:
- Risk Management: Caps losses by allowing you to sell shares at the put’s strike price if the market drops.
- Unlimited Upside: Retains full benefit of stock price appreciation minus the cost of the put premium.
- Cost Basis Impact: The total investment includes the stock purchase price plus the put premium, raising your breakeven point.
- Time Decay: The put option loses value over time if the stock price remains stable or rises, similar to call options.
- Stock Ownership Perks: Unlike buying calls, you keep dividends and voting rights during the holding period.
How It Works
To implement a married put, you buy shares of a stock and simultaneously purchase put options with a strike price near the current market value. This strategy protects you against sharp declines because if the stock falls below the strike price, you can exercise the put or sell it to minimize losses.
The trade-off is paying the put premium upfront, which increases your breakeven price. Your maximum loss is limited to the premium plus the difference between the stock price and the put strike, while your maximum gain remains unlimited, resembling a synthetic long call but without leverage.
Examples and Use Cases
Married puts are often used by investors who want to protect long stock positions during volatile periods or ahead of earnings announcements. Here are some examples:
- Dividend Stocks: Investors holding Vanguard High Dividend Yield ETF (VYM) shares may use married puts to guard against market downturns while continuing to earn dividends.
- Broad Market Exposure: A long position in SPDR S&P 500 ETF Trust (SPY) combined with puts can protect your portfolio from tail risk without selling shares.
- Individual Stocks: Although not a perfect match, married put holders in companies like Delta often seek downside protection during uncertain industry conditions.
Important Considerations
While married puts provide valuable downside protection, the cost of put premiums can erode returns if the stock price does not rise sufficiently to offset the expense. This makes it important to weigh the premium against expected volatility and your investment horizon.
Additionally, time decay reduces the value of your put option over time, so holding puts for extended periods may be costly. You should also consider transaction costs and the impact of implied volatility on option pricing when using this strategy.
Final Words
A married put offers downside protection without sacrificing upside potential, making it a prudent choice for cautious investors. Review current option premiums and stock volatility to determine if this strategy aligns with your risk tolerance and market outlook.
Frequently Asked Questions
A married put is a bullish options strategy where an investor buys shares of a stock and simultaneously purchases at-the-money put options on that stock. This setup limits downside risk while allowing unlimited upside potential.
By buying a put option at the current stock price, you effectively insure your shares against a price drop. If the stock price falls below the strike price, you can exercise the put to sell your shares at that strike, capping your losses.
The maximum profit is unlimited because you retain all the gains if the stock price rises, minus the premium paid for the put. The maximum loss is limited to the difference between the stock purchase price and the put strike price plus the premium paid.
Time decay negatively impacts the put option since it loses value as expiration approaches if the stock price remains flat or rises. This means the cost of the 'insurance' gradually erodes over time.
A married put provides a downside floor with the flexibility to react before expiration, unlike stop-loss orders which trigger an automatic sale. It also preserves ownership benefits like dividends and voting rights.
The breakeven point is the stock purchase price plus the premium paid for the put option. The stock price must rise above this combined cost for the strategy to be profitable.
Yes, an increase in implied volatility slightly benefits the long put option, potentially increasing its value and providing more downside protection.
It is ideal for long-term bullish stock investors who want to protect against short-term price drops while retaining stock ownership perks and unlimited upside potential.
