Basic Option Strategies: Married Put - Part One
Basic Options Strategies: Married Put
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.
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.
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.
...To Be Continued on 5/15
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