Put is an option strategy that protects a stock position while still allowing
option-info and options-graphs sites:
Outlook: Bullish. The stock must rise by as much as the put debit
to have a gain.
buy stock, buy put using the next strike price below the current
when: stock rises enough by the expiration date to overcome the cost
of the put.
when: stock does not rise enough by the expiration date to overcome
the cost of the put.
Loss : limited to the stock buy price - the put strike + the put
Calculation: Stock Price bought + put debit.
compared to stock: Stop loss.
compared to stock: Slightly greater cost, slightly more stock movement
needed to be profitable.
after entry, increasing implied volatility is positive.
after entry, the passage of time is negative.
Requirement : None on the option portion of the trade. Initial debit
must be paid in full.
Using an ATM strike for the put costs more, provides more protection,
and the stock must rise more for the entire position to be profitable.
Equivalent: Long Call, ITM.
- If you
buy stock and buy put(s) at the same time, this strategy is usually
called the "Married Put". You can also buy put(s) for protecting
stock any time you own stock, in which case the strategy is usually
called a "Protective Put". The difference with a protective
put is you may have paid a higher or lower price for the stock than
the current stock price at the time you buy the put.
- The put(s)
put a protective floor under the stock, limiting the loss on the position
no matter how far the stock might fall.
strategy is used by investors who want to own stock, but want to limit
their risk to a known amount.
- This strategy
is helpful to those who want to buy stock but are not sure of their
timing. Many stocks that end up moving higher can get very volatile
right around a good entry price. That can cause normal stop loss techniques
to trigger and take you out of the stock. With a Married Put, the investor
can just relax during the life of the put, since market swings do not
matter. Only where the stock is on expiration day matters.
- A stock
investor may enter all new stock positions with the Married Put strategy.
If the stock moves higher as expected during the life of the put, the
investor can then let the put expire and possibly switch to using trailing
stops to limit losses. If the stock does not move higher, the put will
limit any losses on the position to the amount that was deemed acceptable
on entry of the position.
the life of the put, the position has the same profit and loss potential
as the Long Call, ITM. So an alternate
strategy for a stock investor would be to buy In-the-Money Long Calls
on any stock he wanted to own. If the stock rises in price as expected,
the calls can be exercised to buy the stock at the strike price of the
calls. If the stock does not rise, the loss is limited to the cost of
the calls. This technique has the added advantage of requiring much
less investment capital up front. The investor will only need to make
a large investment of capital in the stocks that he knows are working
- The example
Married Put needs an investment of $5031 to establish. Buying an ITM
45 strike Long Call to use the technique described above would cost
about $539. If the stock then rose as expected, the call could be exercised
to buy the stock at the strike price, which would be another $4500 invested,
for a total of $5039. The investor using this technique only needs to
use large amounts of capital on the stocks that are already working,
and only after the fact. Using the Married Put requires the full investment
up front, before the investor knows which stocks will work out.
this is a bullish position, the investor is obviously expecting the
stock to move higher. If the stock does not move higher, and the time
to expiration gets to just a couple weeks, it is usually wise to exit
the trade, taking less than the maximum possible loss.
- If the
investor is still bullish on the stock but feels he may have missed
on the timing, the currently held long put can be "rolled"
to one expiring in a later month. The currently held put will show a
gain, which will partially offset the loss in the stock price.
- If the
stock moves higher as expected, the investor can sell the put while
it still has some value, and switch to another stop-loss technique such
as a trailing stop entered with his broker.
- If the
stock moves higher as expected, the investor may be able to recover
all or most of the cost of the put by selling a call against his stock.
The position would then become the Covered
- An alternative
way of reducing the cost of the put is to start out with both a long
put and a short call. This strategy is known as a Collar.