Knowing When to Use a Married Put Comes in Handy

A married put is best used in a bullish market. In this type of market, the same protection is available through the married put as in any other market. However, in a bull market, the potential gains from a married put are much higher. To understand when to employ a married put strategy, it is important to understand the function of this model and the cost involved.

What Is a Married Put?

With a married put, you will own shares of a security and a put option on the security simultaneously. As the stock price of the security goes up, your potential earnings off the shares you own will also go up. On the other hand, if the price goes down, you limit your exposure to loss by exercising your put option at a certain value. For example:

  • You purchase a stock at $10 per share
  • You purchase a put option at $13 per share
  • The stock climbs to $15 per share, but you think it may climb higher, so you don't sell your shares or exercise your put
  • The stock drops to $7 per share, and you exercise your put you sell at $13, maintaining a profit at $3 per share

Why Is a Married Put Safe?

The above example is excellent in describing the safety of a married put. You did not sell your shares when you should have, at $15 per share. You held out thinking the price could climb higher, and you were hoping for a bigger gain. If you were not in a married position, you would have been required to sell at the $7 per share or ride out the market further. In any case, this could have represented a loss. Since you held the put option at $13, though, you could never lose money. The least you could hopeful was a $3 profit.

Why Is a Married Put Profitable?

A married put can be profitable because it allows you to take more risks with your portfolio. You can hold out for a high stock price. In the same example, imagine if the stock had dropped to $7 then climbed again to $17. Since you were never afraid of losing too much, you could hold the stock that entire time. You would eventually sell at the $17 per share price, and your profit on that trade would be $7 per share. You would allow the put option to expire.

When Should I Use a Married Put?

Married puts provide good insurance in any market. However, the put option typically expires in a relatively short period of time. In order to capitalize on the protection, then, you would need to sell the security in a short period of time. This would not be profitable in most markets. Only when a market is acting in a bullish fashion, meaning a security climbs in price very quickly, would the profit on this transaction be truly high. Therefore, a married put is a great strategy for a bullish market or a bullish stock.

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