The Married Put is an option strategy that protects a stock position while still allowing unlimited gains.

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Strategy: Married Put

a.k.a. Protective Put

The Outlook: Bullish. The stock must rise by as much as the put debit to have a gain.

The Trade: buy stock, buy put using the next strike price below the current stock price.

Gains when: stock rises enough by the expiration date to overcome the cost of the put.

Maximum Gain: unlimited.

Loses when: stock does not rise enough by the expiration date to overcome the cost of the put.

Maximum Loss : limited to the stock buy price - the put strike + the put debit.

Breakeven Calculation: Stock Price bought + put debit.

Advantages compared to stock: Stop loss.

Disadvantages compared to stock: Slightly greater cost, slightly more stock movement needed to be profitable.

Volatility: after entry, increasing implied volatility is positive.

Time: after entry, the passage of time is negative.

Margin Requirement : None on the option portion of the trade. Initial debit must be paid in full.

Variations: Using an ATM strike for the put costs more, provides more protection, and the stock must rise more for the entire position to be profitable.

Synthetic Equivalent: Long Call, ITM.

Comments

• If you buy stock and buy put(s) at the same time, this strategy is usually called the "Married Put". You can also buy put(s) for protecting stock any time you own stock, in which case the strategy is usually called a "Protective Put". After the positions are established, they are exactly the same.

• The put(s) put a protective floor under the stock, limiting the loss on the position no matter how far the stock might fall.

• This strategy is used by investors that want to own stock, but want to limit their risk to a known amount.

• This strategy is helpful to those who want to buy stock but are not sure of their timing. Many stocks that end up moving higher can get very volatile right around a good entry price. That can cause normal stop loss techniques to trigger and take you out of the stock. With a Married Put, the investor can just relax during the life of the put, since market swings do not matter. Only where the stock is on expiration day matters.

• A stock investor may enter all new stock positions with the Married Put strategy. If the stock moves higher as expected during the life of the put, the investor can then let the put expire and possibly switch to using trailing stops to limit losses. If the stock does not move higher, the put will limit any losses on the position to the amount that was deemed acceptable on entry of the position.

• During the life of the put, the position has the same profit and loss potential as the Long Call, ITM. So an alternate strategy for a stock investor would be to buy In-the-Money Long Calls on any stock he wanted to own. If the stock rises in price as expected, the calls can be exercised to buy the stock at the strike price of the calls. If the stock does not rise, the loss is limited to the cost of the calls. This technique has the added advantage of requiring much less investment capital up front. The investor will only need to make a large investment of capital in the stocks that he knows are working out.

• The example Married Put needs an investment of $5031 to establish. Buying an ITM 45 strike Long Call to use the technique described above would cost about $539. If the stock then rose as expected, the call could be exercised to buy the stock at the strike price, which would be another $4500 invested. The investor using this technique only needs to use large amounts of capital on the stocks that are already working, and only after the fact. Using the Married Put requires the full investment up front, before the investor knows which stocks are working out.

Exits

• Since this is a bullish position, the investor is obviously expecting the stock to move higher. If the stock does not move higher, and the time to expiration gets to just a couple weeks, it is usually wise to exit the trade, taking less than the maximum possible loss.

• If the investor is still bullish on the stock but feels he may have missed on the timing, the currently held long put can be "rolled" to one expiring in a later month. The currently held put will show a gain, which will partially offset the loss in the stock price.

• If the stock moves higher as expected, the investor can sell the put while it still has some value, and switch to another stop-loss technique such as a trailing stop entered with his broker.

Adjustments

• If the stock moves higher as expected, the investor may be able to recover all or most of the cost of the put by selling a call against his stock. The position would then become the Covered Call strategy.

• An alternative way of reducing the cost of the put is to start out with both a long put and a short call. This strategy is known as a Collar.