Using options instead of stock in the Married Put (A Strangle)
One of the common complaints of trading married puts is that they require too much capital and so you are limited by your account size to trade. This is a valid concern since you are buying at a minimum 100 shares and need to buy in 100 share increments (200, 300, 400 , etc.) to make the position a true married put. The reason is that the put option represents 100 shares of stock. This requires capital and unless you have a portfolio margin account you are required to put up at least 1/2 the share cost and the whole put cost.
With a portfolio margin account you are only required to put up the risk of what the trade has on. So for example if I buy XYZ stock trading at 100 and I buy the 105 put for 7 dollars, my risk in the position is 200 dollars and so my margin requirement would only be 200 dollars. In a regular margin account my requirement would be 1/2 the 100 share cost of $10,000.00 and the put cost of 700, so a $5700.00 requirement. Most people however do not have portfolio margin accounts since most brokers require a minimum account size which is pretty sizeable. For example Interactive Brokers requires a minimum of $110,000.00 for a portfolio margin account.
There is another way however to participate in higher priced stocks for less dollars. It requires using options in lieu of the stock. Here is an example. Let’s say that you wanted to do a married put position on MCD (McDonalds). Currently MCD is trading at 268.93, so 100 shares would cost $26,893.00. However you could buy a deep in the money call option with more than 120 days to expiry in place of the stock. Today the 220 strike June 16, 2023 call option is trading around 54.00 or $5,400.00 and it has a delta of 90 which means that it will move .90 cents for every dollar the stock moves. This is the second best thing to owing the stock for a lot less money invested.
To make it a married put position you would need to buy the put as well, and today the 270 put is trading at around 13.50. The total for the position would cost 6,750.00 vs the $28,243.00. Much less capital. Total risk on the option trade which is called a strangle would be 270-220=50 minus the 67.50 equals 1,750.00. The risk on the stock , traditional married put position, is the cost minus the guaranteed exit at 270 which is $1,243.00. There is a little more risk on the strangle trade and it is due to the time value paid for the call option. However the capital requirement as you can see it a lot less.
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