What Is a Married Put? Definition, How It Works, and Example

What Is a Married Put?

Married put is the name given to an options trading strategy where an investor, holding a long position in a stock, purchases an at the money put option on the same stock to protect against depreciation in the stock's price.

The benefit is that the investor can lose a small but limited amount of money on the stock in the worst price drop scenario, yet still can participate in any gains from price appreciation. The downside is that the put option costs a premium and it is usually significant.

In terms of downside protection, a married put may be compared with a covered call.

How a Married Put Works

A married put works similarly to an insurance policy. It is a bullish strategy used when the investor is concerned about potential near-term uncertainties in the stock price.

By owning the stock with a protective put option, the investor receives the benefits of stock ownership, such as dividends and the right to vote. In contrast, just owning a call option, while equally as bullish as owning the stock, does not confer the same benefits of stock ownership.

A married put behaves synthetically like a long call, and as a result will have unlimited profit potential, as there is no ceiling on the price appreciation of the underlying stock.

However, profit is always lower than it would be by owning just the stock. It's decreased by the cost or premium of the put option. Reaching breakeven for the strategy occurs when the underlying stock rises by the amount of the options premium paid. Anything above that amount is profit.

The benefit of a married put is that there is now a floor under the stock, limiting downside risk. The floor is the difference between the price of the underlying stock at the time the married put was bought and the strike price of the put.

Put another way, when an investor purchased the option, if the underlying stock traded exactly at the strike price, the loss for the strategy is capped at exactly the price paid for the option.

A married put is also considered a synthetic long call since it has the same profit profile. The strategy is similar to buying a regular call option (without the underlying stock) because the same dynamic is true for both: limited loss, unlimited potential for profit.

The difference between these strategies is simply how much less capital is required to buy a long call.

Married Put Example

Let's say a trader chooses to buy 100 shares of XYZ stock for $20 per share and one XYZ $17.50 put for $0.50 (100 shares x $0.50 = $50). With this combination, they have purchased a stock position with a cost of $20 per share but have also bought a form of insurance to protect themselves in case the stock declines below $17.50 before the put's expiration.

So, say the stock price drops unexpectedly to $15 per share. The trader's loss of $5 per share on the long position could be partially offset by the put's profit of $2.50.

When to Use a Married Put

Rather than a pure profit-making strategy, a married put is a capital-preserving strategy. The downside loss potential is limited. Bear in mind that the premium paid for the put is a built-in cost that reduces the strategy's savings potential.

Therefore, investors typically use a married put as an insurance policy against near-term uncertainty in an otherwise bullish stock, or as protection against an unforeseen price breakdown.

Newer investors can benefit from knowing that their losses in the stock will be limited. This can give them confidence as they learn more about different investing strategies.

Of course, this protection comes at a cost, which includes the price of the option, commissions, and possibly other fees.