Loading ... ... Please wait!      Loading
Visually Analyze Option Strategies
Market
 Home    Tutorials   Features   APPL 1.0   Webservices   Component-Lib    Login    Subscription   User Guide 



Covered Put

 

Description

 

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.

 

P/L

 

Description: Description: C:\avasaramworkspace\avasaramWeb\web\tutorials\options\Covered Put_files\image001.jpg 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

Example

 

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.

 

Benefit

 

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

 

N/A

 

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.

 

 

 

 

 

 

 

 

 

 
Copyright 2012, Avasaram LLC. All rights reserved. Version 10.1.1 Follow us on   Contact
Disclaimer
The information contained in this website is provided to you "as is," for your informational purposes only, without any representation or warranty of accuracy or completeness of information or other warranty of any kind. In no event will avasaram.com be liable to any party for any direct, indirect, incidental, special or consequential damages for use of this website or reliance upon any information or material accessed via it or any other hyperlinked website including, but not limited to, damages arising from loss of profits, business interruption, or loss of data.