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The Married Put or Put Collar Option is an excellent strategy for earning income from a dividend paying stock while protecting against a downside movement in a stock. The choice of what put option strike to buy determines how much protection an investor is seeking with his married put or put collar option and is often a determining factor in how profitable the trade may end up. With the married put or put collar option strategy it is often a question of what is more important, the amount of protection or the amount of profit. A recent comment on the options forum by a member looking at using margin on a married put or put collar got me thinking about how I would apply the same strategy to the married put or put collar option when using margin.

The Simple Concept Behind The Married Put or Put Collar

There are basically three put options to consider buying with a married put or put collar option.

1) At the money put options which basically protects the investor from any decline in value since the put options are bought exactly where the investor bought the stock. For example the stock is at $29.00 and the investor buys the $29.00 put options to create the married put or put collar option. He is protected against any stock decline from $29.00 down.

2) In the money put options guarantees absolutely no loss on the stock as the investor has bought put options in the money. In other words the stock is at $29.00 and the investor buys the Jan 2014 $30.00 strike put options for perhaps $4.80.  With this married put or put collar option he is totally protected against any loss in the stock from $30.00 down.

3) Out of the money put options will include a loss between the stock value and the put options purchased but is the most commonly used married put or put collar option since it is the cheapest to buy. For example, the investor buys the stock at $29.00 and then purchases the $27.00 put options. The loss the investor will sustain is $2.00 if the stock falls to $27.00 or below. His area of loss is from $29.00 to $27.00.

Added Cost To The Married Put or Put Collar

When discussing the married put or put collar option investors often forget about the cost of the put options they have bought to created the married put or put collar option. This dramatically changes the structure and profit potential of the married put or put collar option trade. Once we take the cost of the put options purchased here is how the married put or put collar option from above stack up.

1) At the money put options cost to purchase the $29.00 put options was $3.65. Therefore the loss should the stock fall below $29.00 will include $3.65. In order for this loss to be handled the investor normally will pick a stock that pays a larger dividend to cover the loss.

2) In the money put options would naturally cost more to buy the put options and put in place the married put or put collar option so again if the Jan $30 put strike cost $4.80 that cost would have to be covered.

3) The least expensive to buy but again with less protection for a married put or put collar option is the out of the money put option, but even if a $27 put option cost perhaps $2.10, that cost must still be covered plus the $2.00 loss ($29 less $27) should the stock fall. Therefore the $27.00  out of the money put option while cheaper to buy in the end should the stock fall, actually is an expensive married put or put collar option trade.

As you can see there is never a “Free Lunch” as they say. I brought up the married put or put collar option trade in this article in response to a post on my free options forum where a member discussed the benefits of using margin and a married put or put collar option trade in REITs. REITs tend to pay higher dividend payouts and they therefore seem attractive for a dividend plus married put or put collar option combination. But often what appears to be a great trade can have hidden pitfalls. Here is my take on the possible trade as discussed by the forum member.

Married put or put collar option Forum Member Comment

This is taken at random from the dividend paying REIT’s that are optionable. The prices are from Fri, 6 July as reported by Yahoo. PLEASE don’t trade this or anything else without doing your own research. I’m not in the business of recommending stocks or options or anything else.
Hatteras (HTS)
Stock: 29.24
Leap put: Jan ’14 puts @ 27. $3.42

At risk (on 100 shares): $2.24 (29.24 – 27.00)
Portfolio Margin required $224 (approx. Each brokerage figures it a little differently. YMMV)
Margin rate 1.5%
Dividend: $0.90 quarterly

ROI on stock price: 12.3% annually — 3.08% quarterly
ROI on margin required: 39.6% QUARTERLY
I figure you should only look at quarterly ROI, since who knows how long this will last.
The ROI is: (dividend) / (margin + margin cost)
The put will eventually erode, but who cares about paying $3.42 for a dividend of $360.
You purchase the put for 2 reasons:
1. Protection against anything bad. Maximum risk is very limited.
2. To minimize the margin required. Portfolio margin is AT RISK $

Earn 12.3% on money you can borrow at 1.5%.
You can do this with many of the REIT’s… and on any other dividend paying stocks.
You just need:
1. Portfolio margin
2. A good broker margin rate
3. An optionable, dividend paying stock

Understanding The Stock And What You Are Getting Into

In the forum’s member trade he is discussing a married put or put collar option strategy on Hatteras Financial Corp which trades on New York under the symbol HTS. I am writing this article on July 9, the trading day after the forum member posted his married put or put collar option trade idea.

First with any stock investment it is important to know what you are getting into before placing any trade. I always look at the fundamentals of the stock and the company. Hatteras earnings per share growth is below the industry average and declining. The most recent earnings per share was $3.8, a decrease of 4.42% over the previous year. Book value is $27.08 and it has an ROE above the industry average with a profit margin of 65.60% and an asset turnover rate of 2.57. The dividend is $3.60 annual for a return of 12.31% based on the present trading price of HTS stock which is at $29.16.

The industry is experiencing positive revenue growth by HTS has been unable to grow gross revenues and is continuing to lose market share. This is in reverse from the previous year when HTS lead the industry revenue growth. The dividend payouts from HTS reflect this loss of growth as they have fluctuated annually over the past years since HTS Stock began trading in April 2008. In 2008 the dividend was .75.  By October 2008 it was up to $1.05 and by September 2009 it was up to $1.15. It then jumped to $1.20 and by June 2010 it was back to $1.10, then $1.00 and now down to .90 cents.

Dividend Amount Is Not Consistent Or Guaranteed 

Problem number one then is the dividend is not guaranteed and this will be an 18 month trade which should secure 6 dividend payments, all of which are important for the married put or put collar option trade to be profitable.

Debt to capital for HTS stock is 86.27%. Market cap is 2.9B and revenue is 451.9 million. Dividend payout ratio is 98 times earnings which is in line with the industry average.

The Married Put Or Put Collar Margin Use Strategy

The idea of the married put or put collar option using margin is basically to capture the dividend, pay a small amount of interest on the margin cost and buy the leap put option to protect against downside in the stock.

The HTS Stock chart for the past year is below. Like any stock there is always room for it to fall and in October last year HTS stock had fallen to a low of $22.33. Because stocks are risky assets, the married put or put collar option makes sense. If HTS stock fell from $29 to $23, that would represent a loss of 20.6%, so the protection provided by the married put or put collar option is warranted.

Married Put or Put Collar Option on HTS Story

The above chart shows HTS Stock for the past 12 month period

In the example from the forum member, he is buying 100 shares of HTS stock for $29.24 for a total outlay of $2924.00. None of the figures in this article include commission. He is then purchasing 1 January 2014 leap put options at the $27 strike for $3.42 to create his married put or put collar option.

Total cost to buy the leap puts is $342.00.

The investor will therefore borrow on margin a total of $2924.00 plus $342.00 = $3266.00

Margin rate at 1.5% means if the trade is held from July to Jan 2014 and rates do not change, the investor will pay a total cost of $72.48 in interest for 540 days of or about 18 months of margin use.

The current dividend is .90 cents per quarter. The investor will earn the Sept and Dec 2012 dividends plus Mar, Jun, Sep and Dec 2013 dividends for a total dividend income of $540.00 if the dividend is unchanged at .90 cents.

Overall then the investor is spending $72.48 in interest payments and will earn $540.00 in dividend income. Total income earned with be $467.52 for a return of 14.3% which is still less than 1% a month.

If the stock should fall to or below $27.00, the investor will lose another $224.00 ($29.24 purchase price less $27 exercise price). Total income would then be $243.52. Total return if the stock ends up at $27.00 would be $243.52 against an outlay of $3266.00 in margin, for a gain of 7.4%.  This is a poor gain for an 18 month period.

If the dividend is cut back to .75 cents the trade will still be profitable but not worthwhile holding.

The Best Gain From This Married Put or Put Collar Option

The best possible gain from this married put or put collar option would not actually be the dividend earned. Instead it would be if the stock rises to or above $30.00 or if it fell below $26.50. In fact if HTS Stock should fall below $26.00 the protective put from the married put or put collar option will become quite attractive.

A dividend cut could turn out to be a blessing and highly profitable. I would have to think that the chance of the HTS Stock dividend being cut below .75 cents by January 2014 is minimal but even if it did occur, the married put will continue to grow no matter how low the stock should fall. In the event of a default in the company, the married put would reflect a huge gain and aside from a terrific run-up in the stock, a collapse would actually be most welcomed.

Another problem with the forum member’s strategy is that the chance of buying the January 2014 $27 put for $3.42 is slim as it is trading at $3.40 bid and $4.00 ask and the options are extremely illiquid with low open interest and wide spreads between bid and ask. For example the January 2014 $30 put is at $5.60 bid and $7.80 ask today (July 9). This makes putting in place a married put or put collar option on a stock like HTS stock very difficult for more than just a small handful of shares.

If the investor ends up buying the January 2014 $27 put for closer to $4.00 the trade’s return will naturally be smaller and as this is an 18 month trade, I would want at least 1% a month guaranteed return to risk my capital for such a lengthy period in a married put or put collar option. While I have often sold leap puts or covered calls, a married put or put collar option trade will need more tweaking should the trade become less profitable as the months advance, while selling naked puts or covered calls in leaps is much easy to manage over the 18 month period.

Enhancing The Married Put or Put Collar With Covered Calls

This trade could be improved by selling a covered call, if the goal of this married put or put collar option was primarily to earn the dividend.

It would be unwise to sell a covered call option against this married put or put collar option trade any closer than January 2014 simply because the trade needs to earn the dividends right up until January 2014 to be fully successful and bring in most of the dividend income.

The January 2014 $30 strike covered call would earn .50 cents. Today the bid is .50 cents and the ask is .85 cents. 12 call options traded at .55 cents today. Therefore an investor could earn .55 cents, which would increase the profit by $55.00. Personally I would try to earn more than .55 cents and put in an offer to sell covered calls for .65 cents. However for the sake of this article, the investor earns $55.00 additional income by selling the January 2014 $30 call.

This means worse case scenario the investor earns a total of $298.55 or 9.1% which again is a poor return for 18 months.  If HTS stock should end up at or above $30.00 by January 2014 options expiry then the return on this married put or put collar option would be .55 from covered call,  plus .76 capital gain ($30.00 exercise less $29.24 stock purchase price) plus $540.00 in dividend income less margin interest of $72.48 (will be slightly less due to the covered call income) for a total return of $598.52 or 18.3%. Now we have reached the 1% a month threshold and this married put or put collar option trade becomes more interesting.

Summary of HTS Stock Married Put Or Put Collar Trade

Overall the return of even 12% is poor for a 18 month period. Instead the better idea if an investor was determined to proceed with this trade would be to consider the married put or put collar trade as an active part of the overall strategy. Should the stock pull back to perhaps $27 over the next few months and exhibit few signs of falling further, an investor could sell his Jan $27 protective put for a profit and wait for HTS Stock to rise and then once again purchase the Put Options to make the trade into a married put or put collar option.

Overall the best that could happen for this married put or put collar option trade to be highly successful would be for HTS stock to slash its dividend and collapse sending the bought puts a lot higher, or for HTS stock to turn around their earnings and bump up the dividend payout which should push HTS Stock over $30.00 providing an exceptional return.

A married put or put collar trade is usually designed more for those who want to hold a stock for a very long period of time, earn the dividend and hope for a gradual increase in the price of the underlying stock. I will include shortly a different example of a married put or put collar trade to show how it can be used successfully but also profitably on a large cap stock. You can also read this married put dividend stock trade example from an earlier article.

I Want A Minimum 1% A Month From This Type of Married Put 

For using margin with a married put or put collar trade I would prefer to earn no less than 1% a month even with the margin interest rate being low at 1.5%.

Instead of this HTS Stock, I prefer to use my margin to sell put options of large cap stocks or even ETFs aiming for 1% a month so that the use of margin actually costs me nothing since I only need the capital in the event that stock is assigned and I am not buying options but selling them which again requires no initial outlay of margin. As well by earning 1% a month my earned income is compounding monthly so that by the end of 18 months I am earning better than 18%.

There is nothing wrong with using the married put or put collar option on HTS Stock as described by the forum member but I find that many REITs have low option volumes. As well put premiums paid when purchasing put options to establish the married put or put collar are unrealistically high and the options are so thinly traded that they are too expensive in relation to what I am earning in return for an 18 month stock investment through this married put or put collar option on HTS Stock.

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  • BillP

    I’m the forum member who posted this trade. I was asked for an EXAMPLE, to show how the use of Portfolio Margin with a married put would work out. I’ll repeat again, that I do not advocate HTS — or any other stock — nor do I own HTS myself. This is a theoretical discussion only.

    That said, I greatly appreciate Teddi’s analysis on this issue, and in general I agree with all she’s said. In the US, large accounts can take advantage of Portfolio Margin, which is calculated as the “dollars at risk.” So for a portfolio margin account, the investment (margin amount) is not $3266 but instead about $250. That changes the expected % return greatly.


  • Hi BillP
    That’s the tough part about option investing. I have heard the same “dollars at risk” method for calculating returns by dozens of newsletters and websites that in particular do option trades like spreads and consider only the capital they have at risk when calculating their returns. This pulls a lot of investors into believing they are going to see enormous returns. It has to be the worst example of scamming investors, many of whom end up laying out a monthly fee for perceived returns of 174% on this trade and 400% of that one. But at the end of the year did they really earn 400% on their portfolio? No
    Instead I believe the better method that should be adopted is how much do you have to invest and what has your return been so far this year. In other words I have 100,000 to invest and I have made 10,000 or a 10% return to date. But instead many newsletters show they had only $700 at risk despite having a total of $10,000 invested in the overall trade and made $250 so they post a return of 35%. Instead I could care less how many dollars they had at risk but instead how much capital was involved in the actual trade. If they invested $10,000 and made $250, then the return was 2.5%. What makes it even worse is these same newsletters take their dollars at risk and their $250 of profit and say, “we made this in 10 days” so our “annualized return is” and they bounce out some ridiculous number.
    I am older than a lot of investors having started investing in the 1970’s. I remember in my first year of investing being told the “proof comes at year end”. You started with $100,000. How much did you net at year end. It is sort of the “proof is in the pudding”.
    I want to thank you for your example of HTS and hope you post more ideas. Keep them coming BillP because they get all of us thinking and that’s what it takes to be a consistently successful investor with winning strategies and real earnings that at the end of the year has actually grown our portfolio with realistic percentages of returns. Take care
    Teddi Knight

Disclaimer: There are risks involved in all investment strategies and investors can and do lose money. Trade at your own risk.

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