Stock Option Investment Advice

Stock vs. Married Put Position Analysis

Married Put Profits Compared to Stock Only Profits:

Using married puts to protect and insure a stock position has certain risk / reward trade-offs.  Each position is a little different. Your profit results will depend on your stock selection, how much risk you take with the purchase of the put, and what income methods you apply to the position.  Two different investors taking positions in the same stock will likely have different outcomes just because of their individual choices for strike price of the put, what income method to apply, and when during the hold cycle to apply the method.  Recently an investor wrote to us about some profit concerns with one of his marred put positions:

“The stock DB was bought 10-4-16 using the Married Put.  The stock is up 57%.  I am only showing a 16% profit because of the Put.  Granted Hindsight is 20/20.  I realize this is a very good return in 5 months.”

This is not an unusual concern for an investor in a bull market using the married put methodology we teach in The Blueprint.  The returns for a married put position will be inherently lower for a stock that rises rapidly because of the cost of the put insurance. If we knew the stock was going to rise 57% over 5 months of course it would have been more profitable not to have the married put at all.  However, hindsight is 20/20 as pointed out by the investor. But. if the stock had gone down by 57% the story would have been quite different. The married put would have limited the loss to only about 4% rather than the full -57%.

In this situation, the risk adjusted gain of 16% with a maximum possible loss of 4% is a really very good return.

However, a 57% stock rise only yielding a 16% married put position return seemed odd.  It has been our experience that the married put position should participate in 50% to 75% of the stock-only return.  In this case we would have anticipated a 28 to 43% return for the married put position. We investigated and did a married put position position analysis to better understand the discrepancy.

What we found with Position Analysis:

I’m not going into the details of the trade and risk losing your focus on the profitability difference.  Examining the details of the trade revealed some basic principals of the married put methodology that were not followed. By doing a married put position analysis we found:

The initial put position was too far in-the-money (ITM).  Buying a put that was 40+% ITM, rather than less than 20% ITM, as recommended in The Blueprint, made it difficult to profit from the stock rise. Puts greater than 20% ITM create a very safe position, but if the put strike price is too high the probability of the stock reaching profitability is very low. Capital gains are sacrificed for the very high safety of the position.  On the other hand, puts at-the-money (ATM) or out-of-the-money (OTM) have the potential of too much risk for the position.

We needs to balance the risk vs. reward with our choice of married puts. Our rule of thumb, as taught in The Blueprint, is a risk level of like 5-9% for the married put position. Maybe consider as much as 7-8% risk if you are bullish on the stock with good growth rates. Higher risk rates increase the profitability of a stock price rise.  Higher risk for higher rewards.

A second observation that adversely effected this married put is the use of a covered call written against the stock (IM#1) for income to reduce the cost of the put insurance. The first call written expired worthless and successfully reduced the cost of the position. But a second call was written just before the stock rose significantly. When the stock rose quickly it exceeded the strike price of the call. This is a very bad condition for a married put position because you lose money on the put and become hedged out of the stock profit with the short call. It is essential to roll the strike price of the call when exceeded by the stock price. Sometimes the call strike price is exceeded because of a gap up in stock price, with little opportunity to roll immediately. In that event, consider a repair of the position outlined in this video. In this case, the second call that was written was well ITM and it reduced the potential gain for the whole position. If the second call was not written the position profits would have been over 22% instead of 16%.

Proper placement of the put combined with the correct maintenance of the second call would have resulted in a 35%+ profit as opposed to the 16% at present. A return which is closer to 60% of the gain realized by the stock alone and a figure we have generally experienced with the married put methodology of The Blueprint.

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