Married Put
The married put is an option strategy that can be used to provide short-term protection against any losses on the stock. This strategy should be used when the investor is bullish to very bullish on the stock. With this strategy, the investor sacrifices some of the potential gains in order to have protection on their investment. This strategy involves two trades:
- Purchasing an underlying stock (equity or index)
- Purchasing a put
This strategy is considered to be safe because if the value of the stock rises, the investor gains on the investment. If the value of the stock falls, the put will rise in value, offsetting the losses. Of couse, the gain is reduced due to the cost of the put. The breakeven price is Stock_purchase_price + premium.
For example, let's say you purchase 100 shares of XYZ stock for $100 per share, and purchase a 3-month put with a $95 strike for $5. This gives a cost basis of $105. If the stock rises, the gains are offset due to the purchase of the stock. If the stock falls, the put will protect the stock if it should fall to any value below $95.