Option Strategies - Long Stock Long Puts / Married Puts

An investor who is long stock and wishes to protect the position from downside risk will receive the most protection by purchasing a protective put. By purchasing the put, the investor has locked in or set a minimum sale price that they will receive in the event of the stock’s decline for the life of the put. The minimum sale price in this case is equal to the strike price of the put. Long puts can be used with long stock to guard against a loss or to protect an unrealized profit. However, by purchasing the put, the investor has increased their breakeven point by the amount of the premium they paid to purchase the put. When looking to establish a long stock long put position, the investor must determine:

  • Their Maximum Gain
  • Their Breakeven
  • Their Maximum Loss

Maximum Gain Long Stock Long Puts

An investor who is long stock and long puts has a maximum gain that is unlimited because they own the stock.

Breakeven Long Stock Long Puts

To determine an investor’s breakeven when they have established a long stock long put position you must add the option premium to the cost of the stock.

Breakeven = Stock Price + Premium

Example:

An investor establishes the following position:

Long 100 XYZ at 55

Long 1 XYZ June 55 put at 3

The investor will breakeven if the stock goes to $58. The stock price has to appreciate by enough to offset the amount of the premium that the investor paid for the option. If at expiration, the stock is at $58 per share and the put expires, the investor will have broken even, excluding transaction costs.

Maximum Loss Long Stock Long Puts

In order to determine an investor’s maximum loss when they have established a long stock long put position, you must first determine the breakeven as outlined above. Once you have determined the breakeven, use the following formula:

Maximum Loss = Breakeven – Strike Price

Let’s take another look at the previous example, only this time we will use it to determine the investor’s maximum loss.

Example:

An investor establishes the following position:

Long 100 XYZ at 55

Long 1 XYZ June 55 put at 3

We have already determined that the investor will breakeven if the stock goes to $58. To determine their maximum loss, we subtract the put’s strike price from the investor’s breakeven as follows:

58 – 55 = 3

The investor’s maximum loss is $3 per share or $300 for the entire position. Notice that the option’s premium is the investor’s maximum loss. When the purchase price of the stock and the strike price of the put are the same, the investor’s maximum loss is equal to the premium paid for the option.

Let’s take a look at another example where the investor’s purchase price is different from the strike price of the put.

Example:

An investor establishes the following position:

Long 100 XYZ at 58

Long 1 XYZ June 55 put at 2

In order to find the investor’s maximum loss, we first need to determine their breakeven. This investor will breakeven if the stock goes to $60, found by adding the stock price to the premium the investor paid for the put. To find their maximum loss, we subtract the put’s strike price from the breakeven.

60 - 55 = 5

The investor’s maximum loss on this position is $5 per share or $500 for the entire position.

An investor who is long stock and long puts has limited their potential losses and has received the maximum possible protection while retaining all of the appreciation potential.

Series 4 Exam Prep

Long Stock Short Calls / Covered Calls
Related Articles
  1. Professionals

    Series 99

    FINRA/NASAA Series 99 Exam Guide
  2. Professionals

    Series 24

    FINRA/NASAA Series 24 Exam Guide
  3. Professionals

    Is A Stockbroker Career For You?

    Becoming a stockbroker requires a broad skill set and the willingness to put in long hours. But the rewards can be enormous.
  4. Professionals

    Buy-Side vs Sell-Side Analysts

    Both sell-side and buy-side analysts on Wall Street spend much of their day researching companies in a relentless effort to pick the winners.
  5. Professionals

    Broker Or Trader: Which Career Is Right For You?

    Both brokers and traders buy and sell securities, but there are some subtle differences between the two careers.
  6. Products and Investments

    How to Create a New Financial Product in 10 Steps

    The 10 steps outlined here are essential to the creation of a new financial product.
  7. Professionals

    A Day In The Life Of A Public Accountant

    Here's an inside look at the workdays of two experienced CPAs, to give you an idea of what it might be like to pursue a career as a public accountant.
  8. Professionals

    A Day in the Life of a Public Accountant

    There’s no typical day in the life of a public accountant, but one accountant’s experience may shed some light on what the career entails.
  9. Professionals

    Financial Career Options For Professionals

    A career in finance can take a business professional down many different paths.
  10. FA

    The Basics of The Series 79 Exam

    Passing the Series 79 exam is usually necessary for anyone who wants to work in investment banking.
RELATED TERMS
  1. Investment Banking

    A specific division of banking related to the creation of capital ...
  2. Bar Graph

    A chart that plots data with rectangular bars representing the ...
  3. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin ...
  4. Investment Banker

    Someone working at an institution raising capital for companies, ...
  5. Series 6

    A securities license entitling the holder to register as a limited ...
  6. Clowngrade

    An upgrade or downgrade of a security for reasons considered ...
RELATED FAQS
  1. How does FINRA differ from the SEC?

    With all the financial organizations out there, knowing what they all do can be as complicated as knowing where to invest. ... Read Full Answer >>
  2. How can I find out if my employer is a member of FINRA?

    To find out if your employer is a member of the Financial Industry Regulatory Authority or FINRA (previously the National ... Read Full Answer >>
  3. I have a CFA designation. Do I qualify for any exemptions from FINRA licensing exams?

    Unfortunately, a CFA charter does not qualify you for any FINRA exam exemptions. Read Full Answer >>
  4. Am I qualified once I complete my FINRA certification exam?

    Even if you have completed your Financial Industry Regulatory Authority or FINRA (previously the National Association of ... Read Full Answer >>
  5. Are hedge funds regulated by FINRA?

    Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
  6. What are working capital costs?

    Working capital costs (WCC) refer to the costs of maintaining daily operations at an organization. These costs take into ... Read Full Answer >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center