Married Put

An investor purchasing a put while at the same time purchasing an equivalent number of shares of the underlying stock is establishing a “married put” position – a hedging strategy with a name from an old IRS ruling.

Market Outlook

Bullish to very bullish among market participants.

When to Use

The investor employing the married put strategy wants the benefits of stock ownership (dividends, voting rights, etc.), but has concerns about unknown, near-term, downside market risks. Purchasing puts with the purchase of shares of the underlying stock is a directional and bullish strategy. The primary motivation of this investor is to protect his shares of the underlying security from a decrease in market price. He will generally purchase a number of put contracts equivalent to the number of shares held.

Profit & Loss Chart

Benefit

While the married put investor retains all benefits of stock ownership, he has “insured” his shares against an unacceptable decrease in value during the lifetime of the put, and has a limited, predefined, downside market risk. The premium paid for the put option is equivalent to the premium paid for an insurance policy. No matter how much the underlying stock decreases in value during the option’s lifetime, the investor has a guaranteed selling price for the shares at the put’s strike price. If there is a sudden, significant decrease in the market price of the underlying stock, a put owner has the luxury of time to react. Alternatively, a previously entered stop loss limit order on the purchased shares might be triggered at a time and at a price unacceptable to the investor. The put contract has conveyed to him a guaranteed selling price, and control over when he chooses to sell his stock.

Risk & Reward

Maximum Profit: Unlimited
Maximum Loss: Limited

Upside Profit at Expiration: Gains in underlying share value – Premium Paid

Your maximum profit depends only on the potential price increase of the underlying security; in theory it is unlimited. When the put expires, if the underlying stock closes at the price originally paid for the shares, the investor’s loss would be the entire premium paid for the put.

Break Even Point

Stock Purchase Price + Premium Paid

Volatility Changes

Increase In Volatility: Positive Effect
Decrease In Volatility: Negative Effect

Any effect of volatility on the option’s total premium is on the time value portion.

Time Decay (Theta)

Negative Effect

The time value portion of an option’s premium, which the option holder has “purchased” when paying for the option, generally decreases, or decays, with the passage of time. This decrease accelerates as the option contract approaches expiration. A market observer will notice that time decay for puts occurs at a slightly slower rate than with calls.