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 the a ...

. 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 An order is an instruction to buy or sell on a trading venue such as a stock market, bond market, commodity market, financial derivative market or cryptocurrency exchange. These instructions can be simple or complicated, and can be sent to either ...

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.

References

{{Derivatives market Derivatives (finance) Options (finance)

See also

References