Married Puts is an option trading strategy used for hedging purposes. This type of options strategy used by traders only.
Know everything about this strategy here.
About Married Puts
Married Puts is a type of Options Trading Strategy. The options traders do not use Married puts options trading strategy frequently.
Although, it has its own advantages and serves its own purpose. It is a scheme which we use for hedging purposes for traders who are thinking of financing in stocks.
It seems almost the same when compared to the protective put. A protective put is also a type of hedging strategy, but there seems to be a few discrepancies between the two strategies.
There are many situations where the traders use married puts extensively with little knowledge about it.
Strategy of Married Puts
The traders use protective put to protect surplus amounts that they earned from long stock positions. They also consider what they can use at a certain point after the long stock position is good to go. It is the same time the price changes.
The married put, on the other hand, is what we use in order to limit probable losses. They could occur out of a long stock position. They use it at the exact same time when a long stock position enters.
A trader typically uses a married put as a type of insurance at the time of purchasing a stock. It is to fulfill any kind of potential loss when the cost of the stock falls instead of rising up. There is typically an amount which we potentially link with picking that insurance.
Nevertheless, the married put, in reality, offers the absolute best of both the worlds. The potential for an infinite surplus in case the stock cost rises up. It is a restricted downside in case it goes down.
Usability of Married Puts
It is a very easy scheme to use as well; one just has to purchase adequately at the money put options in order to fulfill the shares one is purchasing.
The price of all these options is generally the price of utilizing the married put. In case the stock really goes down in worth, then one can try their option for selling the stock. They can do it probably at the cost they paid for that.
In case the stock rises up then, keeping in mind the growth in the cost of the stock to be larger than the price of the puts, one will produce a profit.
The only actual disadvantage of this married puts options trading strategy is that the price will dissolve those profits.
It could happen a little and in case the cost of the stock does not move even a bit; one will most probably lose the amount they emptied on the options.
Nevertheless, that is the cost one pays to limit their potential losses.
Example of Married Puts Option Trading Strategy
Now, for instance, assume that a stock is trading at INR 5000 and someone purchases the underlying shares at INR 5000.
In case the person wanted to protect against the possibility of the stock falling below INR 4000, they could simply buy an INR 4000 put. Now assume that the premium for the put is INR 400.
Now, if someone buys the stock at INR 5000 along with an INR 4000 put for INR 400, and the stock declined to whichever cost less than or equal to INR 4000, one would possibly exercise the put and get rid of the stock at INR 4000.
That would turn into a loss of INR 100 per share, and one would also lose the INR 400 premium for total losses of INR 500.
In case the stock rose to INR 7000 and the INR 4000 put expired without any worth, one would lose an INR 400 in premium paid, but have INR 2000 in unexpected profit on the stock at that point in time. However, the stock would need to increase to INR 5400 in order to cover the loss of INR 400.
Married Puts – Conclusion
Risk reversal may possibly be of use to explain a hedging strategy, usually that the commodities traders use. It is in order to safeguard against possible adverse price actions in an owned asset.
This risk reversal strategy is what the traders use by trading out of the money calls. They also start purchasing out of the money puts on underlying security which they own.
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