Married Put Options Strategy: Know Here in Detail | My Espresso

Married Put Options Strategy Explained

When you buy a put option, you are essentially betting that the price of the underlying security will fall below the strike price before the expiration date. If this happens, you will make a profit on your investment. If the price of the underlying security does not fall below the strike price, you will lose money on your investment.

Published on 21 December 2022

A married put is an options strategy where you buy a put option and simultaneously sell a put option with the same expiration date but a higher strike price. This strategy is used to provide protection against a decline in the price of the underlying security. In this blog post, we will explain what is a married put and how you can use this strategy to protect your investments!

Let's get started.

What is a Married Put?

A married put is an options strategy in which a trader buys a stock along with a put option to hedge against downside risk. The put option gives the trader the right to sell the stock at a specified price, providing protection if the stock's price falls. The key to this strategy is that the trader owns the stock, so they are not subject to the risks of short selling. The downside of this strategy is that it ties up capital in the stock and the put option, which could be used elsewhere.

How Does a Married Put Work?

To enter a married put trade, the trader buys a stock and buys a put option with a strike price at or below the stock's current price. The trader then holds both positions until either the stock price falls to the strike price of the put option, at which point they can sell the stock for that price, or until expiration, whichever comes first.

If the stock price falls before expiration, the trader will make a profit on the put option as it will be in the money. If the stock price doesn't fall before expiration, the trader will still have the stock position and can hold it until it does fall or sell it at any time.

The biggest risk in using this strategy is that the stock price could continue to rise indefinitely, and the trader would be forced to buy more put options to protect their position, which would increase their costs.

How to Use a Married Put Strategy?

Married puts are a part of many investors' portfolios, as they provide protection against downside risk. Here's a step-by-step guide to using this strategy.

Step 1: Determine the underlying stock or ETF you want to buy.

Step 2: Buy a put option on that stock or ETF with a strike price at or below the current market price and an expiration date at least several months in the future.

Step 3: Hold both the stock and the put option until either the put option expires or you sell both positions.

The key to the successful use of the married put option strategy is to find a good stock or ETF to invest in that has attractive upside potential but also enough downside protection provided by the put option.

When to Use Married Puts Options Strategy?

Investors that are optimistic on a stock yet worried about short-term market volatility sometimes utilize married puts. They can safeguard their loss while still having the opportunity to profit from any potential upside by purchasing a put option. Due to this, many investors will find married puts to be an appealing strategy.

When to Avoid Using Married Puts Options Strategy?

Here are these scenarios when married put option strategy won't be great:

  • Purchasing puts might not offer adequate protection if you anticipate a severe decrease in the value of the underlying asset.
  • Purchasing puts might tie up a significant portion of your funds if you only intend to retain the asset for a little time.
  • It could be challenging to choose a put with a specified price that offers appropriate protection if the share price is erratic.
  • Purchasing puts might not be the best course of action if you're concerned that you'll miss out on the possible gain.

The Bottom Line

The married put is a strategy in which an investor purchases an asset and simultaneously buys a put option on that same asset. The goal of this strategy is to provide downside protection in case the asset's price declines. This strategy can be used with stocks, ETFs, and even mutual funds.

It's a relatively simple strategy to implement and can be a good way to protect your investments from market volatility. Therefore, if you are looking for a way to hedge your portfolio, the married put strategy may be worth considering.

Chandresh Khona
Team Espresso

We care that you succeed

Bringing readers the latest happenings from the world of Trading and Investments specifically and Finance in general.