Married put
Encyclopedia
A married put, or protective put, is a portfolio strategy where an investor buys shares of a stock and, at the same time, enough put options to cover those shares.
The term "protective put" highlights the use of this strategy as a hedge
, or insurance, on the invested stock. The buyer of a put protects himself from a drop in the stock price below the strike price
of the put. In the event that the put is not exercised (because the stock price is above the strike price), the buyer has lost only the premium he paid for the put.
A put by itself has a limited upside, or potential gain, which occurs when the stock becomes worthless. By "marrying" (matching) puts with shares of the stock, the resulting portfolio has a potentially unlimited upside (due to the theoretically possible gains of the stock), while limiting the downside (due to the nature of puts). Of course, one must pay for this through the premium for the put(s) and any other transaction costs.
BOT 1 JAN 35 XYZ PUT @ $2.00
Commissions: $.50
Please note that each and all of the above variables (stock price, put strike price, put option expiration date, put price [intrinsic value and/or extrinsic value or both]), commissions, and many more not shown here, are usually carefully considered before applying this strategy.
In order to break even, cost basis plus cost of put plus commissions ($36.00 + $2.00 + $.50 = $38.50). This means that the share price must climb $2.50 before a profit can be realized on the strategy employed.
Since the puts will expire, If one continues to buy puts to hedge the position, one can, over time, effectively increase the costs beyond the probable upward price movement of the stock. In effect, one can over-spend the concept until recovery is highly unlikely. In that sense, repeated use over an indefinitely long amount of time can lead to theoretically unlimited loss.
www.CORPORATEFINANCE.COM
The term "protective put" highlights the use of this strategy as a hedge
Hedge (finance)
A hedge is an investment position intended to offset potential losses that may be incurred by a companion investment.A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, many types of...
, or insurance, on the invested stock. The buyer of a put protects himself from a drop in the stock price below the strike price
Strike price
In options, the strike price is a key variable in a derivatives contract between two parties. Where the contract requires delivery of the underlying instrument, the trade will be at the strike price, regardless of the spot price of the underlying instrument at that time.Formally, the strike...
of the put. In the event that the put is not exercised (because the stock price is above the strike price), the buyer has lost only the premium he paid for the put.
A put by itself has a limited upside, or potential gain, which occurs when the stock becomes worthless. By "marrying" (matching) puts with shares of the stock, the resulting portfolio has a potentially unlimited upside (due to the theoretically possible gains of the stock), while limiting the downside (due to the nature of puts). Of course, one must pay for this through the premium for the put(s) and any other transaction costs.
A simplified example
BOT 100 XYZ @ $36.00BOT 1 JAN 35 XYZ PUT @ $2.00
Commissions: $.50
Please note that each and all of the above variables (stock price, put strike price, put option expiration date, put price [intrinsic value and/or extrinsic value or both]), commissions, and many more not shown here, are usually carefully considered before applying this strategy.
In order to break even, cost basis plus cost of put plus commissions ($36.00 + $2.00 + $.50 = $38.50). This means that the share price must climb $2.50 before a profit can be realized on the strategy employed.
Since the puts will expire, If one continues to buy puts to hedge the position, one can, over time, effectively increase the costs beyond the probable upward price movement of the stock. In effect, one can over-spend the concept until recovery is highly unlikely. In that sense, repeated use over an indefinitely long amount of time can lead to theoretically unlimited loss.
External links
www.CORPORATEFINANCE.COM