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What is an Option? 

 
An investor purchasing a put while at the same time purchasing an equivalent number of shares of the underlying stock is establishing a "married put" position - a hedging strategy with a name from an old IRS ruling.

Market Opinion?

Bullish to Very Bullish

 

When to Use?


The investor employing the married put strategy wants the benefits of stock ownership (dividends, voting rights, etc.), but has concerns about unknown, near-term, downside market risks. Purchasing puts with the purchase of shares of the underlying stock is a directional and bullish strategy. The primary motivation of this investor is to protect his shares of the underlying security from a decrease in market price. He will generally purchase a number of put contracts equivalent to the number of shares held.


 

 

Benefit


While the married put investor retains all benefits of stock ownership, he has "insured" his shares against an unacceptable decrease in value during the lifetime of the put, and has a limited, predefined, downside market risk. The premium paid for the put option is equivalent to the premium paid for an insurance policy. No matter how much the underlying stock decreases in value during the option's lifetime, the investor has a guaranteed selling price for the shares at the put's strike price. If there is a sudden, significant decrease in the market price of the underlying stock, a put owner has the luxury of time to react. Alternatively, a previously entered stop loss limit order on the purchased shares might be triggered at a time and at a price unacceptable to the investor. The put contract has conveyed to him a guaranteed selling price, and control over when he chooses to sell his stock.

 

Risk vs. Reward


Maximum Profit: Unlimited

Maximum Loss: Limited
Stock Purchase Price - Strike Price + Premium Paid

Upside Profit at Expiration: Gains in underlying share value - Premium Paid

Your maximum profit depends only on the potential price increase of the underlying security; in theory it is unlimited. When the put expires, if the underlying stock closes at the price originally paid for the shares, the investor's loss would be the entire premium paid for the put.

 

Break-Even-Point (BEP)?


BEP: Stock Purchase Price + Premium Paid

 

Volatility


If Volatility Increases: Positive Effect
If Volatility Decreases: Negative Effect

Any effect of volatility on the option's total premium is on the time value portion.

 

Time Decay?


Passage of Time: Negative Effect

The time value portion of an option's premium, which the option holder has "purchased" when paying for the option, generally decreases, or decays, with the passage of time. This decrease accelerates as the option contract approaches expiration. A market observer will notice that time decay for puts occurs at a slightly slower rate than with calls.

 

Alternatives before expiration?


An investor employing the married put can sell his stock at any time, and/or sell his long put at any time before it expires. If the investor loses concern over a possible decline in market value of his hedged underlying shares, the put option may be sold if it has market value remaining.

 

Alternatives at expiration?


If the put option expires with no value, no action need be taken; the investor will retain his shares. If the option expires in-the-money, the investor can elect to exercise his right to sell the underlying shares at the put's strike price. Alternatively the investor may sell the put option, if it has market value, before the market closes on the option's last trading day. The premium received from the long option's sale will offset any financial loss from a decline in underlying share value.





Important Note: Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options

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The articles in this section are provided by The Options Industry Council and is intended for educational purposes only and does not in any way constitute recommendations or advice from SogoTrade,Inc. Accordingly, SogoTrade, Inc. is not responsible for the accuracy, completeness, or correctness of the information provided in these articles.

Please note fees, commissions and interest charges should be considered when calculating results of options strategies.  Transaction costs may be significant in multi-leg option strategies, including spreads, as they involve multiple commission charges.

SogoTrade, Inc does not provide tax advice.  Please consult with a tax advisor as to how taxes may affect the outcome of options transactions/strategies.