A Married Put Beats a Covered Call THREE Ways
That’s right… I’ll say it. Married puts are better than covered calls, as short- OR long-term trading strategy.
I WOULD say that no one else does… but a lot of folks have jumped on the bandwagon recently and are beginning to teach the benefits of married puts. Welcome to the club 
SO! Ready to count ‘em off? Here goes:
C.H. shared a trade from November 2009 in which she picked up a cool 7.9% in sixteen days for a covered call trade. I told her that she very likely would have done better with a married put that was assembled according to the principles in The Blueprint.
Using the options trading back-testing feature at http://www.poweropt.com/RAT/, we discovered that indeed… if C.H. had only used a married put trade the way that I teach it, instead of a covered call trade… her return would have been 12.6%, and in a shorter time-frame.
What does THAT do to the silly notion that puts are expensive?
Truth is, most folks know about the protection feature of trading stock and using a put for protection. But what MOST folks don’t know is this…
While protecting you against losses on the downside of a trade, a put option ALSO makes it possible for you to have an unlimited upside.
When you look at the graph of a married put position, it look like a hockey stick. The flat line below the break-even point is firmly on the ice… a representation of the fact that if something goes horribly wrong, your losses are absolutely limited.
On the other hand, that diagonal line going up and to the right represents your UN- impeded profit potential. When you look at the graph of a covered call, on the other hand, the “hockey stick” is upside down.
That doesn’t seem right… does it? By owning stock, you take on all the risks of ownership. On the other hand, if it turns out that you have a winner, say buh-bye to the upside potential. With a covered call trade, you accept a little bit of money in hand NOW… to perhaps be forced to deliver your winning stock to someone else at THEIR price.
Covered calls limit your upside; you might make a little bit of short term income, but then must deliver up your winning stock at a bargain to someone else. Who wins in this transaction?
As Warren Buffet once said… if you’re sitting at a poker table for more than fifteen minutes and don’t know who the patsy is… YOU’RE the patsy!
Don’t worry… while the covered calls strategy will let you have a only tiny stipend for the winning stocks you have picked, and turn those winners over to someone else… you may console yourself by holding onto the losers.
Hey, hope I’m not rubbing it in. Too much. But, hey… if you’re really making those 3-5% per month gains that everyone implied or outright promised, you probably stopped reading a while ago.
There is a THIRD way that married puts outperform covered calls. Not only do they protect better on the downside, not only do they leave the upside open so that a big winner can win bigger…
The third way that married puts outperform covered calls is that the put option itself can be manipulated for profit.
I like to refer to “Spread Trades AFTER the Fact”… when your stock behaves a certain way you can end up with extra money from manipulating the insurance policy that your put is.
In fact, there are TEN different ways to take money out of a married put arrangement without necessarily selling the stock. Interested to find out some of them? Let’s open this board up for discussion…your comments are welcomed below.
March 6th, 2010 at 9:40 pm
I will love to know what are some of that married put winning stragedy
March 28th, 2010 at 6:26 pm
The married put, I believe, consists of buying a stock and buying a put re. the stock. How about buying a LEAP and then buying a put? Would that be an effective strategy?
March 29th, 2010 at 2:48 pm
No. You are paying double for time value (on BOTH sides of the stock’s movement) and need a much larger move to overcome that expense. You also are over-leveraged.
Mike Chupka, my friend over at PowerOptions, trades radioActively and comes across this question all the time. He’s done an excellent job of answering this question in a white paper.
The position you describe is called a long strangle and I don’t encourage it.
May 6th, 2010 at 11:06 pm
Hello, I am fairly new to using derivatives. I did use covered calls in the past, but not recently, because of how I got burned when the stock market lost so much value a couple years ago.
However, I cannot seem to master short-term trading, either, and I recently got burned again with my long termers. They say, use a stop-loss, and I got stopped and lost!!!!!!!!!!! So, I was thinking if I could use covered calls again, somehow, which used to work in a less volatile market; then, I thought to use protective puts, but the puts were so expensive, that the stock would have to increase way much. So, I have been poking around the internet to learn how to use the market in a less risky way to make money. Ao, how can you buy a put, and still make a profit?
May 20th, 2010 at 2:28 pm
Thanks for asking, Susan. The LONG answer to your question is about 245 pages… I wrote a book about it called, The Blueprint.
Short answer, however: married puts do not behave the way everyone assumes. Especially if there is time left til expiration. When I buy a stock and a put option, what I am doing is guaranteeing a favorable exit even in a bad market… like the one that you got “stopped out” in.
However, that’s not where the trading ends… it’s the beginning. If your stock goes UP, as you would hope in the first place, your put does not drop in value dollar for dollar. It may drop fifty cents for each dollar that your stock goes up, at first.
As your stock continues up, you may be looking at losing twenty five cents in your put’s value for each dollar that your stock goes up.
Additionally, once your stock has behaved a certain way, you may use one or more of TEN “Income Methods”… adjustments to the original position, most done at a credit, that take income, lower risk, or both.
Once you have used the Income Methods to lower your cost basis on both the stock and the put, you may find yourself in BULLETPROOF status. “Bulletproof” is the term I’ve been using since 2002 to describe the status of a married put in which the collective cost basis of your stock and put option is BELOW the strike price of that put option… in other words, a place in which you cannot lose but your stock still has the potential to grow.
This is the exact opposite of covered calls trading, in which you take on a big risk in hopes of making 3-5%. I will start out with a 5% risk or so… then perhaps bulletproof it… then go on to big gains.
It doesn’t happen all the time, but it does happen… where I’ll pick up an 8%, a 15%, a 30% or even 40% gain on my stock while being totally protected. By “totally protected” I mean NOT having a finicky stop order in place, but rather having a put option GUARANTEEING my exit point.
Sound good? It did to me! That’s why it’s the only way I trade. Come take a look at one of our twice-weekly webinars.
Happy Trading,
Kurt