The term married put refers to an option strategy involving the purchase of an at-the-money put and simultaneous purchase of the equivalent underlying asset. Married puts are used when the investor is bullish on the underlying asset, but would like downside protection in the near term.
ExplanationA married put is a limited risk, unlimited reward options strategy that involves the simultaneous purchase of an at-the-money put and the equivalent number of shares of the underlying asset. An investor would use this strategy when they believe the stock has long-term potential to increase in price (they are long on the stock) but would like "insurance" against a near term decline.
A put option gives the holder the right, but not an obligation, to sell the underlying asset at the strike price. Buying an at-the-money put ensures the holder will be able to sell their stock at their purchase price if it were to decline in value in the near term. If the stock were to increase in price over time, the put would expire worthless. This is how a married put limits risk. Since the investor believes the underlying asset will increase in value over time, their profit potential is theoretically unlimited.
Eliminating downside risk does come at a cost. The investor will have a profitable position when the price of the underlying asset is greater than the original purchase price plus the premium paid for the put.
An investor believes Company ABC's common stock will increase over time, but is worried about a near term downturn in price. The investor decides to execute a married put strategy by purchasing 200 shares of Company ABC at $25.00, and simultaneously purchasing two DEC 25 put options for $2.00 per share.
If the price of Company ABC's common stock declines below $25.00, the investor will exercise their right to sell their 200 shares at $25.00. In this example, the maximum loss for the investor is $2.00 x 200 shares, or $400.00.
The investor will break even when the price of Company ABC's common stock reaches $27.00 per share (ignoring transaction fees). This is the price paid for the common stock plus the $2.00 per share cost of the put. The investor realizes a profit as the price of Company ABC's common stock rises above $27.00 per share.