When most investors purchase a stock, they do so with the hope that over time it will trade higher and they will earn a profit. The problem is that when “speed bumps” happen, such as a recession or a depression, those same investors find themselves losing large amounts of capital. Most of us protect the assets that we worked for with insurance. We wouldn’t dream of forgoing insurance on our home, car and other valuable possessions so why wouldn’t we protect the money that we expect to grow to fund our retirements and improve our lives from a catastrophe on the stock market? Sadly, most investors don’t know that it is possible to purchase insurance for their stocks in the form of a “Married Put” strategy.
There are two components that make up a married put, the long stock and long put. An investor who owns 100 shares of stock can purchase one long put; one long put option contract being equivalent to 100 shares of stock. This long put will allow an investor to sell the shares at a set price within a specified period of time.
Say that a trader purchases 100 shares of XYZ stock, paying $100 per share. He or she could purchase a 12 month long put option at strike $100. Assume that long put cost the investor $15.00. The total cost of the trade would then be $115 per share, which would make the total investment $11,500.
On the long put options expiration date, if the stock finishes at $100 or higher, the long put would be worthless and the $15 option premium paid by the investor would be lost. To put it simply, the “insurance policy” will have expired and the investor will have lost $15 per share or $1,500. For many, the peace of mind that comes from knowing that the option to exercise the long put and sell the shares for $100 each no matter how low the stock falls is well worth the cost of the option premium.
Think about it this way. If you buy insurance on your house are you upset when your house fails to burn down and you never collect on the policy? Or if your car is never wrecked or stolen? Of course you wouldn’t be. The long put option is a protection against a catastrophe that you hope will never happen. Here are some more examples to help illustrate.
What happens if the stock rises to $150 a share in twelve months? If the trader were just holding the stock, they would have a profit of $50 a share, a 50% return on their investment. If the trader had a married put strategy in place, the stock position would still have a profit of $50 per share but a $15 loss per share would occur because of the now worthless option. The net profit is still quite a lucrative return on their investment and the trader also gained peace of mind knowing that their risk was always limited because of the married put strategy. The next example goes further and shows how married put strategies can prevent a portfolio from experiencing massive depreciation.
Let’s say that the market turned quite bearish as it did in 2008 and a stock lost 40% of its value, say dropping from $100 to $60 in twelve months. If the married put strategy was employed, the trader could have exercised the long put and sold the shares for $100 even though the stock was trading at just $60. Remember, that when a long option is exercised, the debit paid for that option is lost (just like your home/car insurance premium is lost). That means, if the stock were purchased for $100 and subsequently sold for $100 no profit of loss would have occurred, however the trader will have lost $15 per share because of exercising the right to sell the stock at $100. That means a net loss of $15 per share which is still much more attractive than the holding the stock without any insurance.
Go further and imagine what would happen if one of your stocks fell from $100 to $20 without any sort of insurance. You’d welcome only losing the $15 from using a married put strategy. Many stocks in 2008 lost more than 40% and investors could have saved thousands upon thousands of dollars had they only exercised this strategy.
At MarketTamer.com we’ll not only teach you how to use a married put strategy to hedge your stock position in bearish markets but also how to use other innovative tools to actually profit while your stock is declining.
Let’s discuss strategy. After looking at the volatile market we experienced in 2008 and 2009, an investor has to ask themselves “Is it really prudent for me to just own a stock without any insurance in a turbulent and unpredictable bear market where stocks can and do lose 20-30% in just one day?” Almost all investors would say certainly not.
Let’s look at a stock, XYZ that is especially volatile. Twelve months ago it was trading at $100 per share but today that’s shrunk to just $20. Even though there could be tremendous upside potential if the fundamentals had not been impaired, the market is unfairly punishing the stock. If, after employing due diligence, a trader believes that the stock could rise substantially and wishes to stick a toe in the water, a married put strategy would be a wonderful trade to employ in these circumstances.
The trader could purchase the stock at $20 and also buy a six- or twelve-month long put option at the cost of $4 per share. All the stock needs to do is rise more than $4 a share over the next six months and the married put strategy will have produced a profit. On the other hand, if the trader was wrong about “calling a bottom” on that stock, the very most that could be lost is $4 per share no matter how low the stock might fall.
If you’re looking for a way to reduce risk while still retaining the ability to profit from upward movement, the married put strategy is a fantastic way to do just that. It’s not only limited to stocks that are “beaten down”, traders can initiate a married put strategy any time they believe that a stock might be headed higher. The pre-defined risk level, defined even before the trade is entered offers traders priceless peace of mind.
At MarketTamer.com we have modules specifically designed to show an investor how to identify stocks that are trending bullish, bearish and how to set up the married put strategy correctly. Most importantly, you can learn how to profit through trade adjustments even if the stock moves against expectations! Come join a proven winning team today at www.markettamer.com.
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