Married Put Options Strategy (Using MarketXLS)
A married put options strategy is when an investor buys one At-The-Money Put option and an equivalent number of shares of the underlying stock. The married put is a bullish options strategy that is used when the investor sees an upward trend in the stock prices. Investors that are worried about near-term uncertainties when buying the stock, should use this strategy. It gives them many benefits of stock ownership such as dividends and the right to vote. Therefore, even if there is a surprise drop or rise, then the investors still feel protected as they have benefits. A married put is said to be an insurance policy for investors against uncertainty in the stock prices.
An advantage of the married put option is that it is an unlimited profit and a limited risk strategy. In the worst-case scenario, an investor will lose a limited amount of money. A downside of a married put option is that it costs the investor a significant premium. Also the investor has to pay commissions which could sum up to a sizable amount. Buying put options regularly can become expensive therefore this strategy should only be used occasionally. The married put strategy is similar to the long call strategy, the protective put strategy and the call backspread strategy.
If the put expires at the same price as the stock price originally paid, the investor’s loss would be the whole premium paid for the put contract. Investors can sell their shares at any time before the put expires.
Example Using MarketXLS
We will use a MarketXLS template to understand how a married put strategy works. In this example, we are using General Electric (GE) and we want the married put for 2nd July 2021. We are going to buy 100 shares of GE at ask price of $13.43 each and 1 put option contract at 14 strike price at $0.71 ask price. Remember 1 put option contract is equivalent to 100 shares owned.
Net Debit = (13.43 x 100) + (0.71 x 100) = $1,414
Break-Even: Total Stock Purchase Price + Premium PaidBreak-Even = $14.14
In order to break-even, the underlying stock return must match the premium paid. Anything above the break-even is profit for the investor.
As said before, a married put strategy is an insurance for when you think there will be a drop in the value of your position. Therefore, you want protection if your stock drops below $14.
The maximum loss is limited and is calculated by:
((Stock Purchase Price – Strike Price) + Premium Paid) x 100.((14 – 13.43) +0.71) x 100 = $128
The buyer’s maximum loss will occur if the stock price remains at or falls below the strike price of the long put. So if the stock price falls below $14, If the stock price faces a loss, the put option protects the futures bought. Therefore the investor will only lose the premium paid so $71. The loss is limited because this strategy lets you sell your option at the price you bought your option at. If the stock price falls to $10, the investor can exercise their put option and sell the shares at $14.
If the stock price falls below $14, there are three options you can implement:
- Sell the put and keep the futures/the stock position unprotected.
- Extend the protection by selling the put and buying another put.
- Exercise the put and sell the futures to invest somewhere else.
The maximum profit is unlimited. As long as the stock price rises above $14, the investor will make a profit. Looking at the payoff table, if the expiry price is above $14 then the Net Payoff of Strategy shows the profits the investor can make.
It is safer to buy at a price that is closer to the strike price in case the price does not fluctuate too far. However, it will limit your profits too. A rise in the volatility of the stock is beneficial for the investor.
The Bottom Line
The Married Put strategy works great when the investor expects the stock price to be bullish in the near term. This strategy allows the investor to trade safely because the losses are capped and they have a high-profit potential. The investor won’t be too worried because they know the max loss they could make before they start trading. MarketXLS offers 100s of other templates on stock and options strategies: https://marketxls.com/marketxls-templates/
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