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Selling Covered Puts...
Selling Covered Puts

Covered Put Profit Loss Graph

The covered put strategy is just the opposite of the covered call strategy, you sell short the stock to cover the put that is written. The analogy to the covered call is:
Covered Call Covered Put
Buy the stock Short the stock
Collect premium on write of call Collect premium on write of put
Risk is if stock goes down Risk is if stock goes up (because of short)
If called deliver stock owned If assigned deliver stock to pay short
The covered put strategy is a neutral to bearish strategy because the investor is expecting the stock to go down or stay neutral. When the stock drops, the investor will have the stock put to them at the short put strike price. This covers the obligation of the shares of stock that were shorted. The investor keeps the initial premium received from selling the covered put. If the stock rises the investor keeps the premium, but they are still holding the short stock obligation and could sustain a loss to close the short. If the short put does expire worthless without assignment, the investor could look to sell another covered put at a different strike for the next expiration month.
Covered Put StrategyCovered Put Strategy Example: Short Stock XYZ @ $24.67
Selling Covered PutsWrite (Sell) the OCT 25 (ATM) Put at $1.90
Break Even = Short Stock Price + Option Bid = $26.57
Maximum Profit = [(Short Stock Price - Strike Price) + Option Bid = $1.57
% Downside Protection = Option Bid ÷ Short Stock Price = 7.7%
% if Assigned = Max Profit ÷ (Short Stock Price - Net Credit) = 6.9% (If stock below $25 at exp.)
Cautions with the selling covered puts strategy:
The Maximum Risk of selling covered puts is infinite, as the stock can rise infinitely.
Most conservative investors shy away from shorting stock.
If good news comes out, the stock could rise suddenly, faster than the investor can roll the put.
Most investors looking to collect premium trading puts will simply sell a Naked Put or trade a Bull Put Credit Spread.


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Selling Covered Puts - Covered Put Strategy - Covered Put Tips