(Long) Married Put

A (long) married put is an option strategy in which a trader purchases (longs) a put option while simultaneously buying (or already owning) an equivalent number of shares of the underlying stock/ETF. This protects (hedges) the trader against the potential drop of the share price.

You can think of long married puts as a form of “insurance” for securities you already own, this is often called “hedging”.

Options level required to trade this strategy: Level 1

Available in a Registered account? - Yes

Strategy benefits

• Hold your stocks while insuring against any losses.

Strategy downsides

• Reduces your profit due to the option premium paid on the put options.

Setting up the strategy

You buy a put option and simultaneously purchase (or already own) an equivalent number of shares of the same underlying stock/ETF.

When choosing the strike price, consider the following:

• The further out of the money the strike price is, the cheaper the premium will be. However, this strategy offers you less downside protection.
• The further in the money the strike is, the more expensive the option premium will be. As a result, this strategy offers more downside protection.

Married put example

You purchase 100 shares of ABC stock valued at $26 per share. To protect yourself against the potential depreciation of the shares, you simultaneously purchase a put option with a strike price of $24 for $75 (0.75 option premium x 100 shares) with a 30-day expiration.

Although your initial cost to purchase the put is $75, this also caps your total potential loss at $275 [(26 – 24) x 100 + 75].

As the buyer of the put option, you have the right to sell the stock at a $24 strike price before the option expiry date.

Possible results:

1. ABC shares drop significantly over the next 30 days to $20, well below the purchase price of $26. In this case you would exercise the 24 put option on the expiration date to cap your loss at $275.
2. ABC shares rise to $30 over the next 30 days, well above the 24 strike price. The put option expires worthless, but you can now sell your stock at the higher price and realize a profit. In this case, it would be $4 x 100 shares = $400, minus the option premium you paid. Your total profit would be $325.
3. ABC shares stay the same in value at $26 per share, and your put option expires worthless. Your total loss is $75. 

Profit and loss explained

Maximum profit

Maximum profit = [(current stock price – original purchase price) x number of shares] – (option premium paid x number of option contracts x number of shares)

Maximum loss

Maximum loss = [(strike price - current stock price) x number of shares] + (option premium x number of contracts x number of shares)

Break-even at expiration

Break-even point = purchase price + option premium paid per share.