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, someone sells some kind of stock for $90, and simultaneously sells the put for the premium of $20 that has the strike price at $80. So, the break-even point equals $110 ($90+$20). Thus, if the asset is no longer moving in the market, that is the market’s view is short-term neutral, then an investor can get the premium that is equal to $20 and when the stock continues to decline below $80 he gains a profit from this stock movement.