Learn what is a Married Put options and how to use it in order to protect your portfolio. In another section of our site weve talked about covered calls. There, weve explained what call options are and how they work (there is a lot of detailed information about that in other sections of the site, as well).
Put options are essentially the opposite of call options. Where call options give the owner the right to purchase a predetermined quantity of an underlying stock at a specified price (called the strike price) before the expiration date, put options give the owner the right to sell the predetermined quantity of stocks at the specified price before the expiration date.
In the first case, the buyer of the option estimates that the price of the asset will increase, which is why he would want to purchase it at the strike price. In the second case, the estimation is that the price of the asset will drop under the strike price before the expiration date. In both cases the buyer of the option is able to make a profit if his estimations are correct (for more information browse our site).
What is a Married Put and why is it called that?
A married put is an interesting strategy and if executed correctly, it can almost ensure that you wont suffer significant losses, no matter how dire the market conditions get. Its a conservative strategy that can help you hedge (or insure) the stocks you buy. Married put is basically purchasing a set of stocks and then purchasing a put for the same stocks as a form of insurance against a significant decline in the price. To make things clearer, heres an example.
Lets say you choose to purchase 50 shares of JKL for USD 20 per share. Then you purchase JKL USD 17.50 put for 0.50 with the third Friday of October as expiration date. Youve purchased the stocks (50 shares x USD 20 = USD1000) and the put (50 x USD 0.50= USD 25) as a way to protect yourself against a sudden dip in the price. This is what we call a married put. In order for a put to be married, though, you need to purchase the stocks and the put in the same day.
Why would you use this strategy?
At the first glance it seems that this strategy doesnt make sense. Its almost as if you have a pessimistic prognosis about the stock but decided to buy it anyway, which doesnt really make sense. So why would you ever want to use this? You see, the people who think this way (and thus consider the strategy ineffective) tend to look at things rather one-sided. Obviously youre not going to buy stocks you think will dip in the near future (this would be crazy).
However, this strategy is used to protect you from potential assets (as a form of insurance). Youre simply insuring yourself that whatever may happen, you be at a huge loss. Its like buying a fire insurance for your house – youre not doing it because you think your house will burn to the ground, but rather because you want to be sure that if something should happen, you have something to lean on. You simply recognize the unpredictability of life and youd rather be safe than sorry. Most experienced traders prefer to use this strategy for stocks theyre not too sure about but decided to take the risk with, anyway.
Its obvious that you wont be using this strategy for every stock you purchase. This would be insane. It would absolutely eat your profits in the long run. However, its quite natural to go for this strategy when youve taken a risk and to insure yourself against the potential losses that may ensue.
Even though theyre rather unpopular with the more inexperienced, newer investors, married puts are one of the best way those who are new to trading can protect themselves from enormous losses. New traders tend to take bigger risks and their decisions dont always result in the best outcome simply because they lack the experience the make the right calls whenever they have to. Married puts can help protect them from themselves. Furthermore, they are quite useful even for experienced traders when they decide to play a riskier game (but still want to have a safety net).