Many options traders look for simple strategies that do not require much time commitment and are repeatable systems to ensure trading success. One of the most straightforward strategies to follow with easy rules is the married put trading strategy. This article will discuss married puts and how you can successfully trade them.
Married Put Defined
In a married put strategy, you would simultaneously purchase the shares of a stock and a put option on the same stock. This limits your potential losses if the particular stock price falls, while allowing you to participate in any upside movement of the stock. Let’s further discuss the concept of married puts and how you can benefit from them.
To understand married puts, let’s review what a put option is. When a trader purchases a put option, they are essentially buying the right to sell a stock at a pre-determined price (known as the strike price). If the stock price falls below the strike price of your put option, you have the right to exercise your option and sell the stock at the higher strike price. This limits your losses on the position to the premium you paid for the put option.
Now, a married put is an options trading method whereby the investor buys both a stock and a put option on that stock. The purchased put option gives the investor the right, but not the obligation, to sell the underlying security at the strike price. The married put can be used as either a long-term hedging strategy or a short-term speculative trade.
When buying a married put, the investor is bullish on the underlying security and believes that the security’s price will increase. However, by buying the put option, they are hedging their position in case the price of the security falls. Married puts are strategies used commonly by short and long term investors who want to protect their portfolios from a sudden drop in the stock market.
To purchase the put option, the trader usually chooses an “at the money” put option. This is the option strike price that is closest to the price of the underlying stock. For each put option contract purchased, the trader would also buy 100 shares of the underlying stock.
Married Put Trading Considerations
Here are a few factors to consider with married puts:
– Hedging Strategy or Speculation
Married puts can be used as either a long-term hedging strategy or a short-term speculative trade. Thus, if you believe a stock’s price will be volatile for a short period, you can choose to make a short-term entry over a more extended play. Conservative investors often use married puts to protect their portfolios from a sudden drop in the stock market. However, they can also be used by more aggressive investors looking to speculate on a stock price.
– Bullish Sentiment
When buying a married put, the investor is bullish on the underlying security and believes that the price of the security will increase. This is the purpose of purchasing the stock in the first place. The put offers additional downside protection if the stock’s price moves in the opposite direction.
– Downside Protection
Married puts are often used by investors who want to protect their portfolios from a sudden drop in the stock market. Are you concerned, bullish on upcoming earnings or market news that you anticipate will make your stock’s price soar? But, you are also hesitant, as the stock’s price could decline significantly. Well, this is the reason married puts work so well. By buying the put option, you are essentially hedging their position in case the price of the security falls.
– Know Your Numbers
Consider the price of the underlying security, the strike price of the put option, the expiration date of the put option, and the premium paid for the put option when trading married puts. All these items will determine how much you will gain or lose on your put option.
– Protect Your Gains
Married puts can be used to protect gains in a portfolio. Let’s say you already own shares in a stock that has climbed drastically over the last few months. But, you believe that a sudden drop is imminent. But, you do not want to sell your shares as the price could continue to climb. In this case, you can purchase a protective put, which is similar to the married one, except you already own the shares.
– Offset Losses
When buying a married put, the investor is responsible for paying the put option’s premium. The most money you can lose on a put option you purchase is the cost of the option (premium). If the stock price rises significantly, the increase in the stock’s price would need to offset the amount lost on the put option.
– Manage Put Position
If the underlying stock price falls below the put option’s strike price, then the put option could be exercised, and shares will be sold at the strike price. This event occurs if you hold the option to the expiration date or decide to exercise the option early. To avoid this, close your put position once the amount gained on the stock’s price exceeds the loss from your put option.
– Upside Price Limitations
Married puts will also limit any upside potential in the stock price. Although married puts are a great way to hedge, they can also limit the amount of earnings that could have been made if the put was never purchased. If the stock’s price increased significantly, the trader would only be able to realize the gains less the amount of the put option.
The married put strategy is an excellent way to protect yourself from a sudden drop in the stock market while still participating in any upside movement.
Summary: Married Put
In a married put strategy, you purchase insurance for your stocks. No worry if the stock price declines, as you will still have some protection and won’t lose all of your money. This method is a great way to protect yourself in a volatile stock market. Many long-term investors use the married put strategy to obtain a position in stock equity while hedging against negative catalysts in the stock market.
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