- What is the Married put option strategy?
- When should I use it?
- Is this a profitable method?
A Married put (MP) is a method in which the investor holds both the put contract and the underlying asset to trade the binaries. Combined, these two factors can protect investors from market crashes in a powerful way.
MPs are also known as protective puts, mainly used as protection by the bulls. If you practice trading binaries, you will better know how the MP works and when it can be applied.
Newbie traders might find it confusing and slippery to understand how leveraged trading in MP works. Thus, working with a professional advisor is recommended before getting started.
What is the Married put option strategy?
Options trading with an MP entails taking a buy position in any security that the investor wishes to enter. The investor then looks at put options called “at-the-money” for a similar asset to maintain that particular instrument’s drawdown.
A major advantage of this strategy is that the traders will still not lose 100% from their holdings even if the worst case happens. While the price depreciation continues, they can still profit.
The MP usually functions the same way as the insurance companies offer protection from unforeseen circumstances. A bullish method comes into action when the market participants are too curious about short-term unforeseen calamities.
Steps to invest
You can invest in it by below mentioned simple steps:
- The investor purchases shares of a company or at the same time buys put options of the same asset.
- The option holder has the due right to liquidate the position at the strike price within the expiration date. For example, one contract holds 100 shares of a company.
- Bear the option fee in addition to the brokerage and other charges.
Married puts: how do they work?
To manage your portfolio risk, MPs act as a hedge against risk. Such a way is preferred when investors are concerned about near-term market uncertainties.
Despite keeping shares in the ownership with a defensive put option, the shareholder still receives part or whole EPS and voting rights. While exercising a call option is just as optimistic as owning a stock, it offers excellent advantages.
Since the rise in the stock price is limitless, the value of MPs is beyond limits, too, even though the gain on a put option is always less than if the stocks were only bought ordinarily.
To break even, the underlying asset must rise by the premium paid. Any growth above this leads to a profit.
MP offers the same ROI profile as a synthetic long call. Therefore it qualifies as a synthetic long call as well. As a result, it is unnecessary to buy the underlying stock to exercise the call option. This dynamic leads to an unlimited expectation of losses and gains.
By buying long calls, you can lower your capital requirements.
What is the primary purpose of using this strategy?
This method does not seem to make sense at first thought. You bought the security even though it is still in the negative forecast. If you do not need it, what is the purpose of buying the stock?
This whole mindset has just displayed the one-sided view of things, which proves this way ineffective. If you think that the stocks will dip one day, there is no point in investing.
But the MP is generally used as the protection method against the potential liabilities of the insurance. So as you purchase the insurance, you assume that you will be on the safer side no matter whatever situation happens.
For instance, it is not because you are doing it just for home protection when you purchase home insurance. Instead, home insurance is taken to ensure that you still have recourse by your side if something bad happens.
Life is unpredictable, so it is better to stay safe than sorry. Professional traders use this method when they are unsure about any stock. But still, they are willing to take the high risk.
Thus, this method will never work for each of the stocks you purchase. If you think so, then it is absurd. All your earnings will be wiped out. However, you can implement this put strategy when you are all set to take the risk and protect yourself from certain losses.
When should you use a Married put option?
Due to the hedge at the downside, the MP is more of a capital-preservation way than a pure profit-making one. As part of the strategy, a premium is associated with the put part, reducing its earning potential.
As a result, investors typically use an MP to hedge against near-term uncertainty or protect against an unexpected price decline.
Is this a profitable strategy?
Despite their unpopularity among newer, less experienced investors, MPs can be a great way to get started in the stock market. They will be protected from prohibitive losses.
The risks new traders take are often greater, and their decisions don’t always turn out to be as good as they could be. Their inexperience prevents them from making the right decisions whenever they need to. MPs can protect them.
The MP strategy works as both a profit-making way and a capital-protection strategy. The cost of the put portion of the method is thus built into the strategy.
Its put price is responsible for reducing the overall return of this strategy, as it assumes that the underlying stock has started moving higher based on the option cost.
Any bullish stock will face near-term uncertainty, which is the main reason why investors should consider the MP as insurance. Furthermore, it may act as an insurance policy against uncertain and unforeseen price fluctuations.