What is a ‘Fit Put’
A married put is similar to an insurance policy for investors. It is an options trading tactics where an investor, holding a long position in a stock, purchases an at-the-money put opportunity on the same stock to protect against depreciation in the stock’s price.
Enter a discontinuing DOWN ‘Married Put’
A married put is also known as a synthetic long telephone and should not be confused with selling a covered put.
The married put is a bullish game used when the investor is concerned about potential near-term uncertainties in the stock. By owning the store with a protective put option, the investor still receives the benefits of pile up ownership, such as receiving dividends and having the right to vote. In oppose, just owning a call option, while equally as bullish as owning the forefather, does not confer the same benefits of stock ownership.
Both a combined put and a long call have the same unlimited profit potential, as there is no ceiling on the worth appreciation of the underlying stock. However, profit is always lower than it hand down be for just owning the stock, decreased by the cost or premium of the put option gained. Reaching breakeven for the strategy occurs when the underlying stock encourages by the amount of the options premium paid. Anything above that amount is profit.
The benefit of a allied put is that there is now a floor under the stock limiting downside jeopardy. The floor is the difference between the price of the underlying stock, at the time of the gain of the married put, and the strike price of the put. Put another way, at the time of the purchase of the option, if the underlying trite traded exactly at the strike price, the loss for the strategy is capped at specifically the price paid for the option.
Married Put Example
Let’s say a trader chooses to buy 100 rations of XYZ stock for $20 per share and one XYZ $17.50 put for $0.50 (100 shares x $0.50 = $50). With this conspiracy, they have purchased a stock position with a cost of $20/share in but have also bought a form of insurance to protect themselves in covering the stock declines below $17.50 before the put’s expiration. For a put to be considered “allied,” the put and the stock must be bought on the same day, and the trader must instruct their go-between that the stock they have just purchased will be delivered if the put is exercised.
When to Use a Fit Put
Rather than a profit-making strategy, a married put is a capital-preserving strategy. Not to say, the cost of the put portion of the strategy becomes a built-in cost. The put price downgrades the profitability of the strategy, assuming the underlying stock moves higher, by the rate of the option. Therefore, investors should use a married put as an insurance policy against near-term uncertainty in an way bullish stock, or as protection against an unforeseen price breakdown.
Newer investors profit from knowing that their losses in the stock are limited. This can leave off them confidence as they learn more about different allotting strategies. Of course, this protection comes at a cost, which counts the price of the option, commissions, and possibly other fees.