It’s in the Greeks
For many new investors there can be a lot of confusion when it comes to option trades and all the Greeks that are involved with option pricing. One of the key factors of the married put strategy is understanding the Greeks, but in particular the Delta.
First let’s cover the what a married put is and its components. A married put is nothing more than the purchase of a stock and the purchase of a put to protect that stock. For example, yesterday I purchased 100 shares of WMT (Walmart) at 142.58 and simultaneously I purchased the June 16, 2023 145 strike put for 9.30.
The put gives me the right to sell the stock at 145, so if the stock goes to zero I can still sell my shares for 145.00 guaranteed before the expiration date of June 16, 2023. Now since my total investment is 142.58 + 9.30 = 151.88, and I can sell the stock at 145.00, my risk is the difference or 151.88-145.00=6.88 or 688.00.
Most new investors will assume that I can only make money if the stock goes above 151.88 since that is my total cost of the transaction. However this is the big myth of the married put. Delta and time value come into play here, but to make things simple I will cover delta to demonstrate how this trade can make money before the stock reaches 151.88.
The delta of an option will typically be a number between and 100. The deeper the option is in the money the higher the delta and as it goes further out of the money the lower the delta. The Delta of an option will change as the price of the stock changes as well. Most at the money options have a delta of 50. What does the delta mean?
If an option has a delta of 50, it means that for every dollar that the stock moves the price of the option will move by .50 cents. So in my example above the WMT options I purchased had a delta of about .55 since it was in the money. Today WMT is up 1.38 on the day and because the put price goes down when the stock goes up my option price is down by .62 cents. The option price decreased in value by about .45 cents for every dollar that the stock went up. Theoretically it should be .55 , but it’s never an exact amount.
With the WMT stock up 1.38 and my option down .62 I have a net gain on the position of .76 today. I can close the trade today for a gain of 76.00 for every 100 shares of stock that I own. I do not need the stock to move past 151.88 for me to make money. Understanding this fact and how delta affects the married put position is crucial to managing these trades.
Like many new investors the myth of the married put kept me from taking these types of positions, until I realized the power behind delta and how I can use it to my advantage to control risk and allow my positions to have a potential unlimited gain. I hope this article was helpful and you found some value in it. Please hit the subscribe button below get access to more on married puts and safe stock trading.
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