A “married put” is similar to insurance for a stock purchase. The commonly given advice for investors is that options are a risky choice. Some of that risk, however, can be lessened by choosing a married put. Options trading, when used cautiously, can be a way to make up for losses in a bear market.
The Put Option
To understand how a married put works, it is essential to understand how the “put option” functions. A put option gives the investor the right (without a specific obligation) to sell a particular stock on or before a specified date. A put option is one of only two types available (the other is “call”). These are often referred to as “wasting assets” because they come with expiration dates unlike a normal stock purchase.
A put option increases in value when the underlying stock decreases in price (and vice versa). When an investor purchases a put option, he or she wants the stock to decrease in price. (For example, if a put option of 150 for a stock was purchased in January for June, and the stock declined in price to 75 in May, if the investor sold, he or she would make a substantial profit because although the stock was selling on the open market for only $75, anyone holding the put option could sell at the $150 price.)
In the case of the put option, the more a stock price falls, the more valuable the put option becomes. The put option is a contract that allows the investor to sell at more than the market price within the specified option time frame.
The Married Put
The married put (which is often referred to as a “protective put”) works to hedge against the risk of purchasing a put option, much like automobile insurance works to hedge against an accident. When an investor purchases a married put, he or she purchases a put option and an equal number of shares of stock. The option is “married to” the stock. If either is sold, they are no longer married.
Pros and Cons of the Married Put
As with insurance, there is a cost that comes with purchasing a married put that might not be needed. If a put option is purchased, and the price goes down (what the investor initially intended), then the additional cost for the insurance (against it gaining in price) will have been wasted. The investor will have lost some of the total profit that could have been made without it. In this case, using a married put was not worth the risk because things went exactly as the investor planned.
Just how often does that happen, however? If the investor bets that the put option is likely to yield big on a stock that has been ailing, but the stock does a sudden turnaround, the investor stands to lose and lose big. The married put acts as a hedge against that loss. With a married put, if things turn sour, the loss is mitigated. No matter how much loss the investor experiences, it will be limited to the cost of the stock option contract (note that each stock option contract equals 100 shares of stock, so if 500 shares are purchased, 5 stock option contracts are required). For those who cannot comfortably afford to risk their entire investment, a married put gives the investor some ease of mind, minimizing any loss, hedging the bet.
As with any investment choice, it is important for an investor to be knowledgeable and self-reliant. The married put frequently goes unmentioned by brokers, to the detriment of their clients. Knowing the available investment options and assessing their pros and cons go a long way toward helping investors make good investment choices.