Enhancing Married Puts: Mitigating the Annual Cost Drag
This follow-up article addresses the 4% annual cost drag of the married put strategy used to cap SPY portfolio losses at approximately 10%. To offset this expense, selling weekly covered calls is considered but deemed suboptimal due to capped upside during market rallies. Instead, the preferred approach involves selling weekly bear call vertical spreads.
9/15/20252 min read
While the married put strategy effectively caps downside risk at approximately 10% for SPY holdings, it introduces an annual performance drag of around 4% due to the cost of purchasing protective puts. This follow-up explores methods to offset this expense, focusing on income-generating overlays that preserve long-term upside potential.
Addressing the Cost: The Covered Call Approach
One common tactic involves selling weekly out-of-the-money calls against the SPY shares, creating a covered call structure. This generates premium income to partially reimburse the put costs potentially recouping 1-2% annually, depending on volatility. However, this method limits maximum gains to the call strike price plus the premium received, which can be particularly detrimental during strong market rallies where SPY's unlimited upside is curtailed.
This structure limits SPY's profit potential only between the two strikes. If the rally persists beyond the higher strike, the maximum loss on the spread is capped (difference in strikes minus credit), allowing the underlying SPY position to resume uncapped gains. Weekly expirations enable frequent adjustments and capitalize on time decay, enhancing income without overly restricting bullish scenarios.
A Preferred Alternative: Bear Vertical Spreads
A more favorable approach is to sell bear call vertical spreads (credit spreads) on a weekly basis, with 7 days to expiration (DTE). This involves selling a call at a lower strike (typically with a delta of 0.1 – 0.2 for moderate out-of-the-money positioning) and buying a protective call at a higher strike to define risk (1 to 5 USD higher). The credit received helps offset about 2% of the married put's annual cost when sized appropriately.
By layering bear vertical spreads atop married puts, investors can significantly alleviate the hedging cost while safeguarding against drawdowns and preserving rally participation.