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Visually Analyze Option Strategies
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Covered Put




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.


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 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, the investor could look to sell another put at a different strike for

the next expiration month.


Market Opinion


Neutral to bearish.




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When To Use


Use this strategy when you are bearish and want to short a stock to earn income from selling puts. You make money if the stock falls.




XXXX is trading t $50 on February 25, 2011.

Sell short the stock for $49.5.

Sell March 2011 45 strike put for $1.50.




You can generate monthly income from a bearish outlook/position with no money.


Risk vs. Reward


There is unlimited risk if the stock goes up in price. The reward is generating monthly income.


Net Upside


Shorted stock price minus strike price plus premium from put.


Net Downside


Unlimited downside.


Break Even Point


Shorted stock price plus premium from put


Effect Of Volatility




Effect Of Time Decay


Positive as it erodes the value of the put sold.


Alternatives Before Expiration


If the stock stays above the strike but below stop loss, you can let the put expire worthless and keep the premium.


If the stock rises above stop loss, you can buy back the stock or reverse the position.


Alternatives After Expiration


You will be exercised at expiration if the stock closes under the strike. Buy back the stock at the strike price because you have profit from both the premium and the fall in the stock price which hit the lower strike price.










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