Covered Put

Jul 9 18:23

You can use a covered put when you expect a security or asset's price to fall steadily.

Construction of the strategy

A covered put strategy involves two trades.

● Sell a stock

● Sell a put of the stock

The amount of shares sold is equivalent to the amount of put option assets.

Brief description

A covered put is to sell a stock short and simultaneously sell a put option. An investor who uses this strategy has a negative outlook on the stock.

The main purpose of shorting a put is to earn a premium income and lower the cost of a short stock position. It also limits the potential gain on the short stock position if the stock price falls below the put's strike price.

One thing to note is that losses incurred by using a covered put are unlimited, as there's no theoretical price limit on stocks.

Gain & Loss

● Breakeven

Breakeven = Price Stock Shorted At + Premium Received

● Max gain

Max Gain = Short Sale Price – Strike Price + Premium Received

● Max loss

Unlimited

Example

Imagine that there is a stock called TUTU on the NASDAQ, and its current stock price is $50. You expect it to fall steadily, so you use a covered put:

Sell 100 shares of TUTU stock at $50

Sell a $5 put with a strike of $40

(The following calculations do not include transaction costs.)

This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. Read more

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Covered Put

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