Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

Recommended Posts

Traders who enter married put strategies want to own an option's underlying asset, but are unsure if the asset's bullish trend will continue in the short-term. The strategy involves buying a put option ATM and buying the same number of regular shares of the underlying asset. When traders buy the put option, they are essentially purchasing insurance. The most a trader can lose is limited to the amount that he pays in premiums and the difference in the share price on paper. At the same time, there is no limit to how much an investor can gain, since the potential rise of any underlying asset is infinite.

 

Definition of ATM, ITM and OTM for Married Puts

There are three ways to define the relationship between a put option's strike price and the market price of its underlying asset. Understanding the differences between the terms is important because the risks involved in buying puts depend on these terms at the time of the purchase and when assigning assets.

 

attachment.php?attachmentid=27719&stc=1&d=1330724215

 

ATM - At The Money: The underlying asset's market price equals the option's strike price.

Example:

- Put Option XYZJan52 (strike price $52)

- XYZ is trading at $52

 

ITM - In The Money: The underlying asset's market price is less than option's strike price.

Example:

- Put XYZJan52 (strike price $52)

- XYZ is trading at $30

 

OTM - Out of The Money: The underlying asset's market price is more than option's strike price.

Example:

- Put Option XYZJan52 (strike price $52)

- XYZ is trading at $70

 

How to Enter a Married Put Strategy (ATM)

XYZ is worth $52 (market price)

1) Trader buys 100 shares of XYZ preferred stock and pays $5200.

2) Trader buys the put option: XYZJan50($2)

- 100 shares of XYZ stock

- Strike Price $50 (ATM), expiring in 30 days

- Premium Cost of $2

3) Trader pays $200 in premiums (100 x $2 (premium cost)).

 

Result one ITM: XYZ hits $30 (ITM) Any drop in price below $50 puts the option ITM. If this happens, the trader will exercise the right to sell his or her 100 shares for $50 and will receive $5000 from the put seller. The trader's total loss will equal the premiums paid ($200) plus the difference between the asset's purchase price and its selling price (Paid $5200 - Received $5000 = $200). In this case, the total loss is $400.

 

Result two OTM: XYZ hits $70 (OTM) Any rise in price above $50 puts the option OTM. If this happens, the trader will not exercise the right to sell his or her 100 shares. His or her underlying asset will have a paper value of $1800 (100 (shares) x $70 (market price). The $200 in premiums paid reduces the trader's profit to $1600.

 

Result three ATM: XYZ hits $52 (ATM) If XYZ remains at $52 when the put option expires, the trader will not exercise the right to sell his or her 100 shares, but loses the $200 in premiums paid (insurance).

 

Advantage and Disadvantage of Implementing a Married Put Strategy:

 

Pluses: The upside to this type of strategy is that there are no limits to the amount of profit an investor can make. If the underlying asset's market value takes off, the investor's shares will grow on paper. Another advantage in the married put strategy is that the cost of insurance (buying a put) is very low. As a result, a trader can go long and pay only a small fixed premium if things go wrong.

 

Minuses: The downside in implementing a married put strategy is that the investor loses when the value of the option fall ITM. Although, the most an investor can lose is limited.

married-put.gif.44415eac1d36daef02f187bd04c5dd3f.gif

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


  • Similar Content

    • By Lwayne11
      I had a bad experience in trading. I did lost $17,350 in total and i when i try to cash out one story or the other keep coming up to me at every giving point of time so i give up on them.after several weeks i came across this agency,expert recovery that help me get back about 75 percent of my lost funds. I learnt thee is a class action court proceeding to sue scam binary companies but I believe that takes more time and money paid to lawyers is way expensive. You can talk to a recovery expert.
      Reach Asherellazar at protonmail dot com
    • By DHARMIL
      SELL BANKNIFTY F&O - ₹2300
      SELL NIFTY F&O - ₹2700
      SELL STOCKS F&O - ₹5000
      Contact : 9173302081
    • By Ninjatrader_Staff
      Here is a quick educational video we created on Options on Futures.
       
    • By Ninjatrader_Staff
      Options on futures are now available to trade through NinjaTrader Brokerage! This expansion allows options traders to save on their trades with NinjaTrader’s deep discount commissions and benefit from industry-leading support.
      Why Trade Options on Futures with NinjaTrader Brokerage?
      ·  Discount Pricing: Save on trades with simple low rates
      ·  Span Margins: Real-time portfolio margining
      ·  Low Minimum: Open your account with only $1000
      In addition to the FREE NinjaTrader platform included with all brokerage accounts, traders will also have access to the CQG Desktop web-based platform to trade options on futures.
      ·  Current Clients: Contact Brokerage Support to start trading options on futures
      ·  New Clients: Open Your Brokerage Account
      Let Us Know How We Can Help
      Contact our brokerage team at 312.262.1289 to discuss how NinjaTrader’s solutions can be customized for both new & experienced traders.

      Futures, foreign currency and options trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results. View Full Risk Disclosure.
    • By fuqs
      Let's assume I was able to imply dividends from liquid options for the next 3 years, but I want to price an option expiring in the 4rd year from now. How would practitioners normally extrapolate implied dividends? From what i've observed there is a significant risk premium in implied dividends far out (implied divs are sold at discount). Actually the dividend term structure is declining. Therefore probably it makes more sense to extrapolate implied dividend rather than historical growth
  • Topics

  • Posts

×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.