Covered put

Covered put: the idea lies in the process of simultaneous opening a sell position in the stock market and selling the put option on the same asset.

This strategy has unlimited risk when the asset rises substantially directly above the strike price. The highest value of reward is the premium + short stock price – strike price. The break-even point involves the stock price and the premium.

Covered Put

Suppose, we sell the stock for $90 and simultaneously sell the put for $20 that has the strike price at $80. The break-even point equals $110 ($90 + $20). Thus, if the asset price is no longer moving in the market, that is the market is likely to stay in the sideways in the near term, then we can get the premium that is equal to $20. And when the stock continues to decline below $80, we’ll benefit from this stock movement.

Options Glossary