2. Married Put
(See Random Walk’s text Stock, Options & Collars)
A married put is the simultaneous ownership of a stock and a put option. Since a long put gives the owner the right to sell stock at the strike price, any drop in the stock’s value below the strike price is made back by the long put (minus the cost of the put).
The owner of shares may choose to buy the 120 put for $2.44 per share. His thinking is that he will give the stock $5 of room to move to the downside (4% downside) but anything more than that and he wants his loss to stop. By owning the right to sell the stock at $120 (via the 120 strike put) the stock owner often feels he can sleep better at night, but the cost of this put usually is not the best hedge given that every month the stock has to advance by more than 1.95% ($2.44 put cost / stock price) to offset the cost of the put.
