A married put is the purchase of a stock position and an accompanying put option to protect against a fall in price. Put options allow investors to sell stock at a prearranged price on a given expiration date, locking in a sales price. If the value of a stock declines, the investor can take advantage of the higher sales price and exercise the option. When stocks rise past the price specified in the option, the investor can hold on to them and sell them at a later date for a higher profit.
This investment strategy can create a floor for losses. This is a way for investors to limit the possibility of taking a heavy loss on an investment. Investors may use a married put when the market is uncertain. Options allow people to take positions while reducing risk and protecting their investments. Institutional investors as well as individuals can engage in a variety of options trades to meet their needs and insulate their portfolios from losses.
The creation of a married put contract starts with establishing a strike price, an agreed-upon sales price for the stock. Investors also decide on an expiry, or expiration date, and write up the contract. If the investor needs to exercise the option, the stock can be sold for the strike price on the specified date, even if it is higher than the trading price. In the event the stock value climbs, the option expires without being exercised. This means that the investor is out the cost of the option, but the increased profit on the underlying investment makes up for it.
Both the stock and the option can be traded independently on the secondary market. An investor might decide, given a spike in price, to sell a stock before the option's expiry date to take advantage of a potentially highly profitable transaction. Likewise, it is possible to sell the put option if an investor feels like it is no longer necessary. This flexibility with a married put can create liquidity for an investor and ensure that funds will be accessible if they are are needed in a hurry.
Using a married put allows an investor to take what is known as a long position with a stock. This means that the investor knows that it is possible to retain ownership of the stock for an extended period of time to see if values rise without risking losses. If the value drops, the investor has up until the expiry date to decide whether to retain the stock or sell it and abandon the position.