A Simplified Example
BOT 100 XYZ @ $36.00
BOT 1 JAN 35 XYZ PUT @ $2.00
Commissions: $.50
Please note that each and all of the above variables (stock price, put strike price, put option expiration date, put price ), commissions, and many more not shown here, are usually carefully considered before applying this strategy.
In order to break even, cost basis plus cost of put plus commissions ($36.00 + $2.00 + $.50 = $38.50). This means that the share price must climb $2.50 before a profit can be realized on the strategy employed.
Since the puts will expire, If one continues to buy puts to hedge the position, one can, over time, effectively increase the costs beyond the probable upward price movement of the stock. In effect, one can over-spend the concept until recovery is highly unlikely. In that sense, repeated use over an indefinitely long amount of time can lead to theoretically unlimited loss.
Read more about this topic: Married Put
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