I read an article about position sizing using married puts with long stock at radioactivetrading.com. Kurt's strategy of married puts is a good idea, but if you remember from my article on option synthetics, that:
Long Stock + Long Put = Long Call
Kurt could achieve the identical risk profile using only long calls. Asking which trade is better is a trick question. The two positions are identical!
This is what long stock versus a long call (or married put) looks like:
There is a big temptation to use the remaining cash in your account to leverage up and buy more calls. Doing a married put guarantees you won't over-leverage yourself; however, it does tie up a lot of capital and incurs more commissions. It is also two transactions to get filled, but the long stock should be easy to get filled.
Kurt's article was written on March 13, 2014 but the stock prices were taken at the close of Feb 28, 2014. Kurt setup a $200,000 theoretical portfolio of long stock. He then purchased long puts to get the total investment near $200,000. These are the stocks he put in the portfolio:
| #Shares | Company | Symbol | Price/shr. | $ Total |
|---|---|---|---|---|
| 300 | MasterCard Inc. | MA | $77.72 | $23,316 |
| 400 | Spirit Airlines | SAVE | $56.48 | $22,592 |
| 200 | Alexion Pharma. | ALXN | $176.80 | $35,360 |
| 200 | Michael Kors | KORS | $98.03 | $19,606 |
| 800 | Silver Wheaton | SLW | $25.53 | $20,424 |
| 100 | Buffalo Wild Wings | BWLD | $145.00 | $14,500 |
| 300 | Evercore Partners | EVR | $55.64 | $16,692 |
| 300 | FB | $68.46 | $20,538 | |
| $Total = $173,028 |
I've taken Kurt's data and found the -55 to -58 delta puts expiring in Jan 2015. Two stocks didn't have LEAPS in OptionVue going to Jan 2015 but they did have SEP 2014 options, which I used as substitutes. Here's the data:
| Contracts | Company | Symbol | Strike | Put | Call | Debit | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 3 | MasterCard Inc. | MA | $81.00 | $9.00 | $5.80 | $1,740.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 4 | Spirit Airlines | SAVE | $60.00 | $7.90 | $4.80 | $1,920.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2 | Alexion Pharma. | ALXN | $195.00 | $38.70 | $20.65 | $4,130.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2 | Michael Kors | KORS | $105.00 | $16.10 | $9.50 | $1,900.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 8 | Silver Wheaton | SLW | $28.00 | $5.10 | $2.44 | $1,952.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1 | Buffalo Wild Wings | BWLD | $160.00 | $26.90 | $12.10 | $1,210.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 3 | Evercore Partners | EVR | $60.00 | $7.75 | $3.35 | $1,005.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 3 | FB | $77.50 | $16.75 | $7.90 | $2,370.00 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $Total = $16,227.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
We invest $16,227.00 in calls and have $183,773.00 in cash, which represents 8.11% of our total portfolio. Kurt was using about 8% so the numbers are identical (as you'd expect). This is our maximum risk if all of the calls expire worthless.
The puts would cost $30,940. Because the puts are in-the-money, they have some intrinsic value. If you subtract the put intrinsic value and only leave time value, it will be very close to the cost of the calls.
Pros and Cons
All trades have pros and cons. Let's compare the married put to long calls:
| Married Puts | Long Calls |
|---|---|
| Uses more capital | Uses less capital |
| Less flexible | More flexible |
| More transactions. This increases slippage and commissions | Less transactions. Less slippage and commissions |
| Collect dividends | No dividends collected |
| No temptation to leverage up because all capital is being used | Temptation to use cash for other trades, which increases your leverage |
Follow-Up
It's been three months since Kurt pulled prices for the portfolio. Nearly all of the stocks have done poorly despite the overall market rising. SLW was the worst performer by losing -19.45%. The SPX is up about +3.4% during this time. SAVE was the only stock which had risen in price. Despite this group's very poor underperformance, the calls are down $7,105.00 (-43.8%), which represents a -3.55% loss in the total portfolio.
Conclusion
If you are considering a married put strategy, look at the same strike calls and consider buying the calls only. As long as you can avoid temptation of over-leveraging yourself and keep your cash in cash, the long calls probably make more sense.
Married puts and long calls are both bullish strategies. The risk is defined and limited so any losses are controlled, no matter how far the underlying stock price falls. If the underlying stocks you pick don't go up, you will lose money but the losses will be controlled.
Every trading strategy should be evaluated before entering a trade. If you aren't bullish on a stock, don't enter a married put or long call position. There are other strategies you can use if you are neutral or bearish on a stock's outlook.
Join us in our forums to discuss married puts or any other strategy.
Well said.