![Long put option](https://upload.wikimedia.org/wikipedia/commons/e/e5/Long_put_option.svg)
A protective option or married option is a financial transaction in which the holder of
securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
buys a type of financial
options contract known as a "
call
Call or Calls may refer to:
Arts, entertainment, and media Games
* Call, a type of betting in poker
* Call, in the game of contract bridge, a bid, pass, double, or redouble in the bidding stage
Music and dance
* Call (band), from Lahore, Paki ...
" or a "
put" against stock that they own or are
shorting
In finance, being short in an asset means investing in such a way that the investor will profit if the value of the asset falls. This is the opposite of a more conventional " long" position, where the investor will profit if the value of t ...
. The buyer of a protective option pays compensation, or "premium", for this transaction, which can limit losses on their stock position. One protective option is purchased for every hundred shares the buyer wishes to cover. A protective option constructed with a put to cover shares of stock that an investor owns is called a protective put or married put, while one constructed with a call to cover shorted stock is a protective call or married call. In equilibrium, a protective put will have the same net payoff as merely buying a call option, and a protective call will have the same net payoff as merely buying a put option.
A protective option could be used instead of a
stop-loss order to limit losses on a stock position, especially in a fast-moving market. Although buyers of a protective option have to pay the up-front cost of the premium, the advantage is that they cannot lose more money than the option's
strike price
In finance, the strike price (or exercise price) of an option is a fixed price at which the owner of the option can buy (in the case of a call), or sell (in the case of a put), the underlying security or commodity. The strike price may be set b ...
, while a stop order could fill at a price worse than the stop price. Secondly, a stop loss could trigger during a stock's temporary
retracement or pullback just before it reverses back to the original direction again, while an option could last through all of that
volatility until its expiration date.
See also
*
Covered option
A covered option is a financial transaction in which the holder of securities sells (or "writes") a type of financial options contract known as a " call" or a " put" against stock that they own or are shorting. The seller of a covered option re ...
References
{{Derivatives market
Derivatives (finance)
Options (finance)