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Married Calls...

The Married Call strategy is the reverse of a Married Put strategy. In a Married Call strategy an investor will short (sell) shares of the underlying stock while purchasing an equal number of call contracts to protect the short position. The purchased call acts as insurance for the sold shares in the event that the stock increases in value.

Since the investor is shorting (selling) stock there is an overall net credit for the position. The total net credit is equal to the value of the short position minus the premium paid for the long call(s). The net credit is the maximum profit for the position, and is also the Break Even point for the underlying stock. The maximum profit could only be achieved if the stock was trading at $0.00, however some profit can be realized if the stock is trading below the Break Even point. The maximum monetary value at risk is equal to the strike price of the protective call minus the net credit.

Investors use the Married Call strategy to protect the short shares of stock against a large gain in the underlying stock price. This is a bearish strategy, as the investor is looking for a decline in the underlying stock to earn a profit. The purchased call gives the investor extra insurance on the position for an additional cost.

• Short (sell) shares of an underlying security.
• Buy an equivalent number of call contracts against the short shares.
• The value of the short position minus the cost of the call is the Net Credit.
• The maximum risk is equal to the call strike price minus the Net Credit.
• The maximum profit is equal to the Net Credit (if the stock drops to $0.00)
• The Break Even point is equal to the Net Credit minus the call ask price.
• Profit is realized when the stock is trading below the Break Even point.

Calculations for the Married Call Strategy are:

Net Credit =	Short Stock Price - Call Ask Price
Break Even =	Net Credit
Maximum Risk =	Call Strike Price - Net Credit
% Max Risk =	Maximum Risk / Net Credit
Maximum Profit =	Net Credit (if stock is at $0.00)
Example 1:	Stock XYZ at $49.07 per share Short 100 shares stock XYZ at $49.07 Buy 1 contract 40 strike Call (ITM) for $10.90
Net Credit (Max Profit) =	$49.07 - $10.90 = $38.17
Break Even =	$38.17
Maximum Risk =	$40.00 - $38.17 = $1.83
% Max Risk =	$1.83 / $38.17 = 4.8%

This example is an In-the-Money Married Call example. The strike price of the call is lower than the current underlying stock price. This would give the investor the right, but not the obligation, to buy shares of stock at $40.00 to cover the short anytime between now and the expiration date. However, because the call is ITM, the investor has to pay a higher premium because of the intrinsic value.

Example 2:	Stock XYZ at $49.07 per share Sell 100 shares stock XYZ at $49.07 Buy 1 contract 55 strike Call (OTM) for $1.05
Net Credit =	$49.07 - $1.05 = $48.02
Break Even =	$48.02
Maximum Risk =	$55.00 - $48.02 = $6.98
% Max Risk =	$6.98 / $48.02 = 14.5%

The OTM Married Call strategy in this example has a lower ask price, thus the position has a higher Break Even value that is closer to the current stock price, but a much higher maximum risk. Since the 55 call is OTM, the short position is not protected until it reaches $55.00 per share, when the investor would realize the maximum loss for the position.

Advantages of the Married Call Strategy:

• Potential profits can be significant in a down trending market.
• The maximum loss is limited due to the protection of the call.
• Married Calls allow investors to enter a short stock position with low % risk.
• Provides safety against a surprise gap up in the after hours or pre-market.

Disadvantages of the Married Call Strategy:

• The investor will have to pay an additional premium for the extra protection.
• Although this bearish strategy greatly reduces risk, it does not erase all risk.
• Since an option is purchased, time works against the investor unless the stock moves down in value equal to the decay of time value.

Research Tips:

• If you like the idea of additional protection or insurance, but you are bullish, check out the Married Put strategy.