What is the Married Put Strategy? | Protective Puts vs. Married Puts Explained
Investing in the stock market can be a lucrative way to grow your wealth, but it also comes with risks. One way to manage those risks is by using a married put strategy.
The married put allows the investor to limit potential losses while still allowing for long-term investment gains.
What is a Married Put?
A married put is a type of investment strategy that involves purchasing a stock and simultaneously purchasing a put option on that same stock. Buying a put option allows the investor to sell the stock at the strike price, allowing them to limit losses in case the stock drops.
For example, suppose an investor purchases 100 shares of XYZ stock at $50 per share and simultaneously purchases a put option with a strike price of $45 per share for a premium of $2 per share.
If the stock's value drops to $40 per share, the investor can exercise their put option and sell the shares at the higher strike price of $45 per share, limiting their losses to $500 (the difference between the purchase price and the strike price, minus the premium paid for the put option).
Married Put vs. Protective Put
Married puts and protective puts are two similar but distinct investment strategies. While both strategies involve purchasing a put option to protect against potential losses, there are some key differences between the two.
A married put is a specific type of protective put that involves purchasing a stock and a put option on that same stock simultaneously.
On the other hand, a protective put is when you buy a put on a stock you already have in your portfolio. The benefit of a protective put is you can wait until you are in profit on your position to buy the put, allowing you to pay less premium.
However, if you are showing an unrealized loss on your investment and buy a put, the stock can move up and cause you to limit your upside potential.
What is the Maximum Loss of a Married Put?
The maximum loss of a married put option is the difference between your cost basis of the stock and your puts strike price minus the premium.
For example, let’s say you buy 100 shares of a stock at $100 per share and buy a $90 strike put option for $2. Your breakeven point on this trade is $88, including the premium. Therefore your max loss is $12 per share, or $1,200.
Your maximum loss on the put option itself is $200, which is simply the price you paid for it.
When Should You Buy Protective Puts?
The best time to buy a protective put is when you want to hold a stock as a long-term investment but believe it will decrease in the short term. Long-term investors may not want to sell their stocks and realize a tax gain, making the protective put a great way to reduce downside losses instead of selling.
Investors may also consider protective puts when implied volatility is low and they expect it to increase. When market conditions are shaky, the protective put can help lower the volatility of your portfolio.
Is Buying a Put Bullish or Bearish?
Buying a put is a bearish strategy, as it generates a profit when the underlying stock price moves down. If the stock's value decreases below the put option's strike price, the investor can exercise their option and sell the stock at the higher strike price and realize a profit.
Otherwise, you can sell the put option for a profit instead of exercising it if you want to keep holding the shares.
Married Put Strategy | Bottom Line
Married puts can be useful for managing risk in volatile markets or for investors who want to maintain a long stock position while protecting against potential downside risk. However, investors should consider the potential costs and downsides before using this strategy.
If the stock goes sideways or increases, you will lose money on the put option and slightly limit your upside potential.
Tastytrade Disclosure
tastytrade, Inc. (“tastytrade”) has entered into a Marketing Agreement with Marketing Agent (“HaiKhuu LLC.”) whereby tastytrade pays compensation to HaiKhuu LLC. to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of HaiKhuu LLC. by tastytrade and/or any of its affiliated companies. Neither tastytrade nor any of its affiliated companies is responsible for the privacy practices of HaiKhuu LLC. or this website. tastytrade does not warrant the accuracy or content of the products or services offered by HaiKhuu LLC. or this website. HaiKhuu LLC. is independent and is not an affiliate of tastytrade.
tastytrade was previously known as tastyworks, Inc.
