TOOLS OF THE TRADE

THE MARRIED PUT

The ‘Married Put’ sometimes characterized as the ‘Protective Put’ is a combination strategy that comprises two trading instruments. 1) long stock and 2) the long put.  The position is the synthetic equivalent to the ‘Long Call’.  In fact, you will notice that the risk graph of the ‘Married Put’ is identical to the ‘Long Call’.

The risk in the trade is equal to the cost of the put and the difference between the stock value and the put strike price.  Example- XYZ stock trading at $26.25 with a 25 strike put costing $1.75.  The risk in the position is $3.00.  ($26.25 stock minus the 25 strike put = $1.25 plus the put cost of $1.75 = $3.00.)  In effect, the trader could purchase a long call at a value of $3.00 or less with the expectation of the stock rising and establishing a position that carries a risk/reward that is equivalent to a married put.  The risk control in the long call is that the trader is limited to losing only the cost of the long call which is in this example limited to $3.00 or less.

The advantage of the ‘Married Put’ is that stock does not come with an expiration date and if the stock pays a dividend, it can create and additional income.  On the other hand, the long call allows the trader to leverage the position because the trader can control shares of stock for less money. 

The ‘Married Put’ strategy is a wonderful way to protect the downside risk and reduce the cost basis of the stock when and if the stock should fall.  In a way, one could view the ‘Married Put’ as portfolio insurance.  If the stock falls for any number of reasons, the trader is guaranteed to be able to sell shares at the long put strike price for as long a period of time as the long put is in effect.

Study the risk graph of the ‘Married Put’ and you will gain insight into the risk/reward of the position.  Happy Holidays!!  Best, Robin

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