Learn to Trade Options: Why Traders Use Married Puts

Breaking down married puts with options guru, Bernie Schaeffer

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    Trading options can be a complicated process as a lot of options strategies are available and traders need to evaluate all of the possible routes ahead of executing a trade. As such, Schaeffer's are starting a new educational series titled Optimizing Your Options Strategies. The beauty of options trading is that there are options strategies for every market environment. In this series, we will cover all available options strategies for an educated trader to consider when identifying trading opportunities.

    In this article, we will be talking about one of the most popular options strategies known as Married Puts. When using a married put options strategy, traders hold a long position in a stock and also purchase an at-the-money (ATM) put option on the same stock in an effort to protect against potential downside in the short term, or against potential stock price depreciation.

    A benefit of choosing married puts from the list of available options strategies is that the trader is able to cap his potential loss to a limited amount of money on the stock, in the worst-case scenario. This options strategy still allows the trader to participate in any stock price gains that happen as a result of stock price appreciation. 

    The slight downside, however, to selecting married puts from the list of available options strategies is that the put option has a premium which can be significant based on the stock one owns. There is also the issue of additional commissions that must be paid, depending upon the brokerage being used. Be sure to check out Schaeffer's Broker Center for a list of our partners that offer special deals to Schaeffer's readers.

    If you have mastered covered calls, you will catch on to how married puts work pretty quickly. In fact, married puts are incredibly similar to covered calls. The difference is that, instead of selling a call option on the underlying stock like you would with a covered call, you buy a put option to protect you from the downside with the married put strategy.

    A married put is essentially an insurance policy for your stock. The married put options strategy is a bullish options strategy used by traders concerned with a potential near-term drop in stock price. Utilizing the married put options strategy enables traders to reap all the benefits of owning the stocks, like receiving dividends and voting rights. If a trader is simply buying call options, he does not access these benefits of stock ownership.

    A married put options strategy behaves similarly to a long call option purchase as both have unlimited profit potential, because there is no limit to how much the stock can appreciate at price. However, the potential profit from the married put options strategy is much lower than the potential profit from purchasing a long call option due to leverage. The underlying stock simply does not have the leverage that an options contract does, and the additional cost of purchasing the put option further decreases the profit potential.

    In order to breakeven using married puts, the underlying stock return must be equal to the premium paid for the put option. Anything above this breakeven point is pure profit.

    What is the maximum profit potential of a married put? Potential profit is unlimited as the underlying stock price can rise indefinitely. However, the profit is reduced by the cost of the put option purchase and brokerage commissions.

    What is the maximum loss potential of a married put? Potential loss is limited to an amount equal to stock price minus put option strike price, plus the cost of the put purchase and associated commissions. This maximum loss is realized only if the stock price is at or below the strike price of the put option at expiration. If such a stock price decline occurs, then the put option can be exercised, or sold.

    A married put is generally not used as a profit-driving options strategy, but rather it is used as a capital-preserving options strategy. The cost of the put option purchase is the total cost of this options strategy (plus commissions). Investors should only implement the married put options strategy as an insurance policy. Why? Because, more often than not, the trade will end up as a loss if the underlying stock price doesn’t move significantly higher. This added protection for your stock portfolio will come at a cost including the price of the put option, commissions, and other potential fees.

    Consider simply buying put and call options when looking at all available options strategies. Buying options is extremely simple, provides the power of convexity (unlimited upside with capped downside), AND can result in significant portfolio growth in a much shorter period of time than a stock portfolio. Schaeffer's offers a wide variety of put and call option buying strategies that are great for beginners and experts, alike.

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