The Fed just announced they’re raising interest rates by one quarter-point for the second time this year, bringing rates above 1% for the first time since 2008 – which could hurt your portfolio.
So there are two things you should do to protect yourself:
The first helps you lock in steady income every month.
The second offers you unlimited profit potential – with limited risk.
A married put strategy is where you buy a stock and an at-the-money put (the strike price is the same as the stock’s market price) or an out-the-money put (the put’s strike price is lower than the stock’s market price) to protect yourself against the risk of the markets falling. So you’re selling the right to put to the markets (sell) at least 100 shares of the stock the stock you own at the strike price of the put option you bought.
When using this strategy, you don’t have any contractual obligations to sell the stock at any price. You have spent money to protect or insure your shares by buying-to-open the put option.
This is an example of a married put trade using MSFT, again, as an example…
In this scenario, you own the stock at $58.03 and bought the put option at $1.45.
So if the markets run higher, you’ve only lost that premium. Now you could also sell-to-close the put you bought in order to scrounge up a little bit of that premium. But either way, the total cost of your trade is $59.48. So gains made over that amount are yours to keep.
And say the markets drop…
You still own the stock you bought, which now has the potential to increase in value – even high enough to offset any losses from the stock’s drop in price.
Now both of these strategies are great to use in a rising interest rate environment. But the number one question I’ve been asked by my students over the years is, which one is better?
And honestly, I’d have to lean slightly to the married put because I don’t like to risk giving up my stock over a significant price increase. I also don’t like to risk leaving any money on the table should my stock get called at a lower price, which could happen when using the covered call strategy.
The married put strategy, though, lets you keep your upside open on the stock, with only the cost of the put piercing your overall profit potential. And with the opportunity to make money on the put when the price falls – while still keeping the stock – you have the option to buy more stock at a reduced price using the money you made from the put you sold. So you essentially get to cost average down the price of the stock you like while still cashing in on the markets.
|Here’s Your Trading Lesson Summary:
- Both covered calls and married puts are a great way to protect yourself and earn income when the Fed raises interest rates.
- With covered calls, you already own the stock and are selling the right to buy the stock at a specific price on or before a specific expiration date.
- With married puts, you buy the stock and an at-the-money or out-the-money put option.