What Is a Married Put?
Let me explain what a married put is. It's an options trading strategy where you, as an investor holding a long position in a stock, buy an at-the-money put option on that same stock to guard against any drop in its price.
The key advantage here is that you can limit your losses to a small, defined amount even in the worst-case scenario of a price plunge, while still benefiting from any upward movement in the stock. However, remember that the put option comes with a premium, and it's often substantial. You might compare this to a covered call for downside protection, but they serve slightly different purposes.
How a Married Put Works
Think of a married put as an insurance policy for your stock investment. You're bullish on the stock but worried about short-term risks, so you buy the protective put. This way, you get all the perks of owning the stock—like dividends and voting rights—without them if you just held a call option.
Synthetically, this setup mimics a long call option, offering unlimited profit potential since there's no cap on how high the stock can go. Your profits will be reduced by the put's premium, though. Breakeven happens when the stock rises enough to cover that cost—anything beyond is pure gain.
The real value is in the floor it creates: your maximum loss is the difference between the stock's purchase price and the put's strike price, plus the premium. If the stock is at the strike when you buy, your loss caps at the premium alone. It's essentially a synthetic long call with the same limited loss and unlimited upside, but it requires more capital than just buying a call.
Married Put Example
Here's a straightforward example to illustrate. Suppose you buy 100 shares of XYZ stock at $20 each and also purchase one XYZ $17.50 put for $0.50 per share, totaling $50 for the option.
If the stock falls to $15, your $5 per share loss on the stock is offset by a $2.50 gain from the put, softening the blow. This setup ensures you're protected below $17.50 until expiration.
When to Use a Married Put
You'd use a married put more for preserving capital than chasing profits. It caps your downside, but the premium eats into potential gains, so it's like buying insurance against sudden price drops in a stock you're otherwise optimistic about.
Short-term traders or those expecting volatility might find it useful, especially around events like earnings announcements. For long-term investors, it's often unnecessary since short-term fluctuations shouldn't matter. New investors can gain confidence knowing losses are contained, but factor in the costs—premiums, commissions, and fees add up.
Frequently Asked Questions
- What is a married put option? It's a put bought simultaneously with the underlying stock, also called a protective put.
- How does it help investors? It hedges losses by offsetting stock declines with put gains, limiting downside while keeping unlimited upside.
- Who uses married puts? Mainly short-term bullish investors protecting against near-term risks, not long-term holders indifferent to temporary dips.
The Bottom Line
To wrap this up, a married put lets you hold a long stock position and buy an at-the-money put to shield against price falls. You limit losses to a manageable amount in bad scenarios but can still capture gains if the stock rises—though the premium is a notable cost.
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