Let’s go over options and specifically “Put” options before we go in to what a Married Put is.
What are options?
A stock option gives investors the opportunity to buy and sell stocks at an agreed upon price. There are many strategies for stock options, one of which is the married put.
What is a put option?
There are 2 types of options. A call and a put. A put option allows you to purchase or sell a particular stock for lower than the price is currently. When buying a put option you are typically trying to protect against a lower stock price. Put options are essentially stock price insurance.
What is a married put?
Married put is a stock option strategy that reduces the risk of uncertain stocks. Married puts are also commonly known as protective puts. The married put strategy is where an investor buys shares in lots of 100 shares of a stock, and at the same time they buy enough puts to cover those shares. This strategy will reduce, but not limit potential gains, while severely limiting potential losses. A married put is where you purchase a put, or insurance, along with your stock to protect yourself from falling stock prices. If the price of your stock drops too much when your married put expires, then you are protected and losses are minimized.
When does a married put expire, and what happens when it does?
When you purchase a married put, it comes with an expiration date. The expiration date for options is the 3rd Friday of each month unless that Friday is a holiday then it will expire on the Thursday before. If your stock price is lower than the price listed on the put when it expires, then you get to sell your stocks for a higher price to minimize your losses.
What are the investment objectives of a married put?
The objective of a married put is to drastically limit the potential losses that occur from drops in stock prices.
What are the risks of a married put?
There is not much actual risk from a married put, other than the reduction of your potential earnings. However, the price of your stock will have to rise somewhat in order to break even with a married put.
What is a realistic example of a married put?
Let’s say you buy 100 shares of company XYZ for $10 each, and when you buy these stocks, you also buy enough XYZ March $9.00 puts to cover these stocks for $0.25 each. Now if your stock is below $9.00 per share when the expiration date in March is reached, then you will be able to sell your shares for $9.00. Let’s say that when the expiration date is reached, XYZ shares are worth $5.00 each. Without a married put, you could only sell them for $5.00, which results in a $500 loss. With a married put, you can sell them at $9.00 each. Once you take into account the $0.25 spent for the put, the loss is only $125. With this married put, your shares will have to reach $10.25 to break even. Your max gains are limitless, but will be reduced by the $0.25 spent on the put.
While married puts do reduce your earnings by a small amount, they are successful in eliminating much of the risk of investing in the stock market. They are very helpful if you are unsure of a stock’s stability, or if you want the benefits of a stockholder without the risk. Married puts can be extremely beneficial, as the stability of a particular stock cannot be completely guaranteed.