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Married Puts

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Yesterday, my portfolio manager for volatility, "Steady" Eddie turned to me and said incredulously, "I can't believe that television is reporting that married puts will no longer be allowed and their commentators didn't even know what they are!" As usual when the teletubbies incorrectly report something, Eddie quickly sent off an email to the network to explain and correct their error. As usual, he received no response.

A married put is a way to obtain long stock to sell quickly by a trader who wants to be short a stock. The long stock is used to sell on minus ticks. Essentially, once that long stock is sold, the trader is left in the same position as short stock. The only reason for executing a married put is to circumvent the short tick rule, which slows down a trader shorting a stock by requiring that they sell the stock on plus ticks only (a plus tick is created when the last trade is higher than the previous one). Plus ticks almost always require selling on the offer side. Here is how it works.

A trader, wanting to quickly get short a stock and wanting to therefore circumvent the short tick rule, calls a broker and arranges to buy stock and buy a deep in the money put. The price he pays for the combination is only a few pennies over intrinsic value. For example, if stock X is trading at 50, he buys 50,000 shares at 50 and buys 500 November 70 puts at $20.02. The broker is willing to sell him this combination because there is virtually no chance that the stock can go above 70 (where there is risk for the broker) by November.

The trader is then free to sell out the long stock on minus ticks. Once the stock is sold that leaves the trader long 500 November 70 puts as the only position. This is essentially the same as short stock.

Yesterday as reported on television, the SEC has written a letter to brokers that essentially warns brokers against this type of activity, especially if it occurs over the counter.

I just wrote this to clear up any confusion Minyans may have had over what a married put is.
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No positions in stocks mentioned.

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