Basic Option Strategies: Married Put - Part Two
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.
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