Married put is an option strategy used to protect your investment from an unexpected crash in stock price.
This situation arises when you have gained a substantial profit from your stock and you still want to keep them isolated from any downfall in the market.
Let’s have a look at this strategy below with Nifty future and option as a live example.
In order to construct a married put you will have to,
- But 1 lot Nifty January Futures at 8422.
- Buy Jan 8400 PE at 83.
Your outlook is bullish and you expect another 150 – 200 points upside movement in Nifty in January. But sometimes things will not work out as you expected. So let’s evaluate your strategy at three different levels on January expiry.
- Nifty has scaled up to 8622 as you expected. Here I am considering it for ease of calculation.
- You gain 200 points it futures. If you square off it today then you earn 200 x 75 = Rs. 15000.
- 8400 PE will expire worthless and you will loose the entire premium spent to purchase it ie ( 83 x 75 ) = Rs. 6225.
- Your total earnings from this position will be 15000 – 6225 = Rs. 8775.
- Nifty drops below your put option strike and closes at 8300.
- You incur 122 points loss in futures. It amounts to a total of ( 122 x 75 ) = Rs. 9150.
- 8400 PE will gain an intrinsic value of 100. But you have spent Rs. 83 to purchase it. So you gain ( 100 – 83 x 75 ) = Rs. 1275 from it.
- Your total loss in this situation will be 9900 – 1275 = Rs. 7875.
- Nifty drops down to 8000.
- You loose 422 points in futures. Net loss in this position will be ( 422 x 75 ) = Rs. 31650.
- Your 8400 will gain an intrinsic value of 400. You have a profit of ( 400 – 83) x 75 = Rs. 23775 from this position. Note that you have spent Rs. 83 to purchase it, so we are deducting it from net profit.
- Your total loss in this situation would be 31650 – 23775 = Rs. 7875.
You might have noticed in the last two scenarios your loss is same. That means you are insulated from any sudden drop in the market.
As I said earlier, married put is a protective strategy. You are not earning anything extra from the put option contract. You loose the cost to purchase the put contract most of the mark conditions. But it acts as an insurance policy when there is a disaster.
Hope this article helped you to master another investment strategy. Happy reading…