|Married Put Construction|
|Long 100 Shares|
Buy 1 ATM Put
A married put strategy is usually employed when the options trader is bullish on a stock, wants the benefits of stock ownership (dividends, voting rights, etc.), but wary of uncertainties in the near term.
Unlimited Profit Potential
The formula for calculating profit is given below:
- Maximum Profit = Unlimited
- Profit Achieved When Price of Underlying > Purchase Price of Underlying + Premium Paid
- Profit = Price of Underlying - Purchase Price of Underlying - Premium Paid
|Married Put Payoff Diagram|
The formula for calculating maximum loss is given below:
- Max Loss = Premium Paid + Commissions Paid
- Max Loss Occurs When Price of Underlying <= Strike Price of Long Put
The underlier price at which break-even is achieved for the married put position can be calculated using the following formula.
- Breakeven Point = Purchase Price of Underlying + Premium Paid
An options trader is very bullish on XYZ stock but worried about near term uncertainties. He establishes a married put position by purchasing shares of XYZ stock trading at $52 in June while simultaneously buying SEP 50 put options trading at $2 to protect his share purchase.
Maximum loss occurs when the stock price dive to $50 or below at expiration. With the SEP 50 puts in place, even if the stock price dive to $30, he will still be able to sell his holdings for $50. Therefore, his maximum loss is limited $2 in paper loss + $2 in premium paid for the options = $4.
On the upside, there is no limit to the profits should the stock price head north. Suppose the stock price goes up to $70, his profit will be $18 in paper gain less $2 paid for the put protection = $16.
However, if the stock price remain unchanged at expiration, he will still lose $2 in premium paid for the put insurance.
For ease of understanding, the calculations depicted in the above examples did not take into account commission charges as they are relatively small amounts (typically around $10 to $20) and varies across option brokerages.
However, for active traders, commissions can eat up a sizable portion of their profits in the long run. If you trade options actively, it is wise to look for a low commissions broker. Traders who trade large number of contracts in each trade should check out OptionsHouse.com as they offer a low fee of only $0.15 per contract (+$8.95 per trade).
The following strategies are similar to the married put in that they are also bullish strategies that have unlimited profit potential and limited risk.
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