Options strategy: Married Put
A Married Put is a basic option strategy involving a long put option and a long stock/future position (depending on the underlying). Indeed, this is a well-known protective strategy when a trader is expecting a downward move in the near future. The choice of strike price determines where the downside protection starts. If the stock remains high, the trader still gets the benefit of upside gains. (In fact, if the short-term forecast brightens before the put expiry date, it could be sold back to lower its initial cost). However, if the stock falls below the strike price, as originally expected, the trader has the benefit of several choices.
One possibility is to exercise the put, which will triggers the sale of the underlying. The strike price sets the minimum exit price. If the long-term outlook became bearish, this could be the most prudent move to do. If the worst seems to be over, an alternative for still-bullish investors is to keep the stock and sell the put. The sale should recoup some of the original premium paid, and may even result in a profit. For example, a trader expecting significant downward move on ABC stock (which he currently owns in his book), currently trading at $100, can buy a Mar22 90 Put. If in Mar22 ABC stock drops below $90, the trader can exercise its put option and offset losses from its long stock position (which tumbled). On the contrary, if ABC stock rises above $100 in Mar22, the trader will not exercise its put option and will gain on its long stock position (as said before, he can sold back its put to lower the whole strategy cost).
Married Put Payoffs:
This strategy looks like a long call option and offers the same payoffs at maturity if the underlying price increases. The married put determines a kind of floor price under which the underlying price cannot fall. If the stock keeps rising, the trader benefits from the upside gains (as stated above). Yet no matter how low the stock might decline, the trader can exercise the put to liquidate the underlying at the strike price.