A married put, also known as a protective put, is an options strategy that involves buying both a put option and the underlying asset. The put option provides downside protection in case the asset price falls, while the underlying asset offers the potential for upside if the asset price rises.
The key to this strategy is that the put option must be bought at the same time as the underlying asset, hence the name "married put."
This strategy is often used by investors who are bullish on an asset but want to limit their downside risk. For example, let's say you buy shares of XYZ stock at $100 per share. You also buy a put option with a strike price of $95, which expires in one month.
If the stock price falls below $95, you can exercise your put option and sell your shares for $95 each, which limits your loss to $5 per share. If the stock price rises above $95, you can hold on to your shares and let the option expire worthless.
The biggest downside to this strategy is that it can be expensive, since you're effectively buying insurance against a decline in the stock price. But if you're bullish on a stock and want to protect your downside, a married put may be the right strategy for you.
Why sell a put instead of buy a call?
There are a few reasons why selling a put may be preferable to buying a call.
The first reason is that when you sell a put, you collect premium up front, which immediately gives you a positive position. When you buy a call, you pay premium and only start to see a positive return if the underlying asset increases in value.
Another reason is that selling a put generally requires less capital than buying a call. This is because when you sell a put, you are obligated to buy the underlying asset at the strike price if the option is exercised, but you are not obligated to pay the full price of the underlying asset. When you buy a call, you are obligated to pay the full price of the underlying asset if the option is exercised.
Lastly, selling a put may be a good way to generate income or hedge a portfolio.
What is the difference between covered call and covered put?
A covered call is a bullish strategy whereby an investor writes (sells) a call option on an asset they already own. The investor collects premium from the sale of the option, but if the underlying asset's price increases above the strike price of the option, then the investor may have to sell their asset at the strike price.
A covered put is a bearish strategy whereby an investor writes (sells) a put option on an asset they already own. The investor collects premium from the sale of the option, but if the underlying asset's price decreases below the strike price of the option, then the investor may have to buy more of the asset at the strike price. What happens if I buy a put option and the stock goes up? If you buy a put option and the stock goes up, then you will most likely lose money on the trade. This is because the put option will likely decrease in value as the stock price increases.
What happens when you sell a covered put?
When you sell a covered put, you are selling the right to sell a stock at a specific price. The buyer of the put option can exercise their right to sell the stock at any time before the expiration date of the option, and you are obligated to buy the stock from them at that price. If the stock price falls below the strike price of the option, the buyer will exercise their option and you will be forced to buy the stock at a price higher than the current market price.
Can you sell a put option out-of-the-money? Yes, you can sell a put option out-of-the-money. An out-of-the-money put option is a put option with a strike price that is higher than the current market price of the underlying asset. This means that if the option is exercised, you would be required to sell the underlying asset at a price that is below the current market price.
The main advantage of selling an out-of-the-money put option is that it has a higher chance of expiring worthless, which means that you would keep the entire premium. However, the downside is that if the option is exercised, you may have to sell the underlying asset at a price that is lower than the current market price.