covered put strategy is just the opposite of the covered call strategy.
sell short the stock to cover the put that is written.
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.
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
next expiration month.
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.
is trading t $50 on February 25, 2011.
short the stock for $49.5.
March 2011 45 strike put for $1.50.
can generate monthly income from a bearish outlook/position with no money.
is unlimited risk if the stock goes up in price. The reward is generating
stock price minus strike price plus premium from put.
stock price plus premium from put
Of Time Decay
as it erodes the value of the put sold.
the stock stays above the strike but below stop loss, you can let the put
expire worthless and keep the premium.
the stock rises above stop loss, you can buy back the stock or reverse the
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.