Lesson 10: What is a married put strategy?

• With this trade style, you already own the underlying shares and you buy a protective put to protect against a downside move in the shares.
• Alternately, you can submit an order to buy shares, wait for that order to be filled and then buy the put options.
• This is also known as “legging in” to a strategy.

• When both parts of the trade are submitted as one, the trade is known as a married put strategy. You’re buying the shares and buying a put to protect them at the same time.
• A married put is a multi-leg trading strategy (MLS). You’ll specify the net price you want to pay: the cost to you of the shares you are buying plus the premium you’ll pay to buy the put. In this multi-leg strategy, both parts of the trade have to be filled at the same time, at the price you specify or better. If those conditions aren’t met, the trade won’t execute. In essence, it’s a form of contingent order — both parts get filled or neither do.
• You may receive a partial fill on a married put multi-leg strategy trade, but only in the ratio that you’ve specified. For example, if you’re buying 200 shares and 2 married puts, you may be partially filled on 100 shares and 1 put. Your fill will always reflect the ratio that you’ve specified — in this example, 1 put for every 100 shares.

Investors typically use this strategy when they want to continue to hold a stock or ETF for the longer term but seek protection against short-term declines. Because you still hold the shares, you’ll participate in any share price appreciation, but you’re protected until the option expires against downside moves below the option’s strike price. For this protection, you’ll pay the price of the put option’s premium, plus commission.

You might ask: If you’re worried that shares you hold could decline, why not just sell them rather than paying for protection? There are two main reasons:

1. You want to hold the shares for the long term, perhaps to collect the stock’s substantial dividend or because you’re optimistic about the long-term outlook for the company. You’re unsure whether you’ll have another chance to buy the shares later at an attractive price.
2. You realize your fears may not be justified but, just like with travel insurance, you’d like some protection just in case. There may be an upcoming market event, such as an earnings release, that could negatively affect the shares, or the overall market environment may be quite uncertain.

Typically, a married put is chosen at the money or just out-of-the-money. This strikes a balance between paying a high premium for the put — the more the put is in-the-money, the more expensive it is — and providing protection at a strike price that’s not too far away from the stock’s current price. Far out-of-the-money puts may fail to provide the protection you require, as the stock has to fall below the strike price for the put to provide dollar-for-dollar protection on the falling stock price.

It can also be prudent to choose an option with a fairly small bid-ask spread, good daily volume and good open interest.

Before expiry

Depending on how far out-of-the-money it is, your put will generally increase in value if the linked stock’s price declines — the gain on the put will offset some of the loss on the stock, especially as the current value of the stock moves below the option’s strike price. You could sell the put (sell to close) at or before expiry and take a profit on the put itself if you’re correct about the stock’s decline. If you sell, however, you’ve removed your protection against further drops in the stock price, although you’ve realized the profit on the put. Alternately, you could continue to hold the put until expiry, in which case the protection remains in place but market movement on the underlying stock may affect the value of your put.

Also remember that the put loses some of its value continuously as its expiry date approaches due to time value erosion. Additionally, it loses time value faster in the period just before expiration. This happens even if the stock price doesn’t move and is a negative for you as the put option holder.

A drop in implied volatility will also generally cause a put option to lose value, a negative for you as the option holder. Conversely, a spike in implied volatility will almost certainly push the put option price higher, a positive for you if you already own the put. Implied volatility can increase before an earnings release, for example, then drop substantially if the announcement contains no major surprises and the stock price has little reaction. Implied volatility could also increase after the announcement if the stock reacts with more volatility than previously expected. Implied volatility usually also increases if financial markets overall become more volatile, even when there is no news specific to your stock holding.

At expiry

If you keep the put until expiry and the stock closes out-of-the-money, you’ll lose the original amount of the option premium that you paid, plus the commission you paid to buy it.

If your put is in-the-money at expiry, you can sell it for a profit before market close on its last trading day. You can also exercise the put and sell your stock at the exercise price, if you’ve decided that you no longer want to keep the stock. Remember that in order to exercise, you must typically own 100 shares for every put option being exercised. It is possible to exercise puts where you don’t own any of the stock or to exercise more puts than you have stock, but this will result in a short position and is only available to clients with a short selling account.

Note that you may need to take action if your put option closes in-the-money at expiry and you don’t wish to sell your stock. Review lesson 3 for more details.

If you sell your married puts or allow them to expire, your stock or ETF holding will no longer be protected after the sale or expiry. If you want to maintain protection, you’ll need to purchase new put options and you’ll need to make a new decision about strike price and expiry date. You don’t need to wait until expiry to do this, of course, and you might choose to do it when your existing puts become far out-of-the money because the stock price has risen. At that point, the puts you hold are offering little protection and you may wish to close that put position and purchase puts with a strike price closer to the current stock price. If you keep both the existing and new put positions, recognize that both positions still need to be monitored, especially at expiry.

Even if you don’t plan to purchase a new put position immediately, you might still wish to close your put position prior to expiry so that you control the outcome of the trade.

Corporate actions like stock splits, reverse stock splits, mergers, or acquisitions can affect the underlying stock and, consequently, the option's structure, price, or deliverable. Be sure to stay informed about any corporate actions that may impact your married put position. You can do this by regularly checking both your account holdings and any news on the stock.

If you’ve purchased put options to protect the value of a holding and that stock undergoes a corporate action, the options may adjust, and your protection may or may not be maintained for your new holding. Once again, please remember to stay on top of corporate actions as it’s your responsibility to verify that your holdings are protected in line with your trading strategy.

Next up is Lesson 11: What are long straddles and long strangles?