Investors buy a stock with the hope of the security trading higher over time. However, when 'speed bumps' occur, like a recession or depression, those same investors lose significant amounts of capital. If you own a home, car, boat or another favorite and valuable asset you will have insurance on them. You will protect your hard earned assets from catastrophe. So why not protect your hard earned money and retirement from a stock market catastrophe? Unfortunately, most investors are unaware that insurance can be purchased for their stocks as well in the form of a 'Married Put' strategy.
A married put comprises two components (long stock and long put). If an investor owns 100 shares of stock, one long put could be purchased. One long put option contract is equivalent to 100 shares of stock. A long put allows an investor to sell shares at a set price within a specific time frame. Let's assume a trader buys 100 shares of XYZ stock at $100 per share. A 12-month long put option could be purchased at strike $100. Let's assume the investor paid $15.00 for the long put. This brings the total cost of the trade to $115 per share for a total investment of $11,500.
If the stock finished at $100 or higher upon the long put option's expiration date, the long put would expire worthless and the investor would lose the $15 option premium. Essentially, the 'insurance policy' would expire, meaning the investor would lose $15 per share or $1,500 ($15 x 100). However, what is 'peace of mind' worth knowing you could always 'exercise' the long put and sell the shares for $100 per share no matter how low the stock may fall? Are you upset when your house does not burn down? Are you upset if your car is never in an accident? No, of course not! So do not be upset if the insurance policy is 'worthless' after twelve months. The long put option was there to protect against a catastrophe. Let's take a look at some examples.
What if the stock rose to $150 per share in twelve months? If a trader were just 'long the stock', they would have a $50 per share profit or a 50% return on investment. Since the trader has a married put strategy in place, the stock position would still profit $50 per share but the option would be worthless, meaning a $15 loss per share would occur. The net result is still a very attractive return on investment and the trader still had 'peace of mind', knowing that the married put strategy limited the downside risk. Some traders feel a long put option in conjunction with stock ownership (married put) is not a useful tool because they expect their stock to rise, not fall. However, in the next example you can see why married put strategies can save a portfolio from massive account depreciation.
In this example, let's say the market turned quite bearish (like it did in 2008) and a stock lost 40% of its value. Let's say the stock dropped from $100 to $60 per share in twelve months. Since a married put strategy was employed, the trader could exercise the long put and sell the shares for $100 even though the stock was trading at $60. Keep in mind, when a long option is exercised, the debit paid for that option is lost (similar to a car/home insurance premium). Therefore, if the stock was bought at $100 and sold for $100, no loss or profit would occur. However, $15.00 per share is lost due the trader 'exercising' the right to sell the stock at $100. The net result would be a $15 per share loss but that is still much better than just holding the stock outright with no insurance! Could you imagine if one of your stocks went from $100 to $20 without any insurance? The married put strategy sure would provide benefit! In fact, many stocks during 2008 lost much more than 40% and this strategy could have saved investors thousands upon thousands of dollars. At MarketTamer.com, we show you how to use a married put strategy in bearish markets to hedge your stock position but also employ other innovative tools to actually profit while your stock is declining.
Now let's move on to discuss strategy. Given the wild turbulent market in 2008 and 2009, an investor truly has to look in the mirror and ask, 'Do I really want to just own a stock without any insurance in a volatile and unpredictable bear market where stocks can lose 20%, 30% or more in one day?' Most investors would say no.
Let's say XYZ stock is especially volatile and was trading at $100 twelve months ago but today is trading at $20. There could be tremendous upside potential if the fundamentals have not been impaired but the stock has been unfairly punished by the market. If a trader has conducted due diligence and believes the stock could rise substantially and wants to 'stick a toe in the water', a married put strategy could be a great trade to employ. The trader could buy the stock at $20 and buy a six-month or twelve-month long put option at strike $20. Let's say the six-month long put option cost $4 per share. The stock just needs to rise more than $4 in the next six months and the married put strategy can produce a profit. Meanwhile, if the trader is incorrect about 'calling a bottom' on the stock, the most the trader could lose is $4 per share regardless how low the stock may fall.
The married put strategy offers a fantastic way to reducing risk while still enabling traders profit from upward movement. Furthermore, a stock does not need to be 'beaten down' in order to use a married put strategy. The married put strategy can be initiated anytime a trader believes the stock may be headed higher. The married put strategy offers peace of mind due to a pre-defined risk level that is known before the trade is even entered. 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.