Married put
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A married put is formed when an investor buys shares of a stock and at the same time, a put option contract. The married put has the benefit of "insuring" a stock; that is, in the event of falling prices an investor can be sure of a favorable, exact exit price. If the protected stock rises, the investor is under no obligation to sell. The upside, or potential gain, is unlimited. On the other hand if the stock in question falls, the loss is limited. This hedging phenomenon gives the holder the ability to "cut losers short and let the winners run", a time tested trading maxim. The strategy of the married put is normally employed by institutional investors but can be used by private individuals as well.
It is generally considered to be a bullish sign when institutional investors buy puts, because they are shoring up a defense for their holdings rather than selling. Holding or buying drives prices up; selling drives them down. When a large mutual fund buys put option contracts, they betray their intention to hold the protected stocks for a period of time.
There are several facets to a married put position: First, blocks of 100 shares of the stock are purchased. Then, each block is insured by a put option contract with a certain strike price and expiration date. Finally, the price of the contract is composed of both intrinsic value and time value. All of these facets should be considered and weighed before the investor opens a married put position.
