Covered Put

Watch the explainer2:51

Writing Covered Puts is a bearish options trading strategy involving the writing of put options while shorting the obligated shares of the underlying stock.

Limited profits with no downside risk

Profit for the Covered Put option strategy is limited and maximum gain is equal to the premiums received for the options sold.

Try the Covered Put Calculator

Unlimited upside risk

As the writer is short on the stock, he is subjected to much risk if the price of the underlying stock rises dramatically. In theory, maximum loss for the Covered Put options strategy is unlimited since there is no limit to how high the stock price can be at expiration. If applicable, the Covered Put writer will also have to payout any dividends.

Breakeven Point(s)

Example

Suppose XYZ stock is trading at $45 in June. An options trader writes a Covered Put by selling a JUL 45 put for $200 while shorting 100 shares of XYZ stock. The net credit taken to enter the position is $200, which is also his maximum possible profit.

On expiration in July, XYZ stock is still trading at $45. The JUL 45 put expires worthless while the trader covers his short position with no loss. In the end, he gets to keep the entire credit taken as profit.

If instead XYZ stock drops to $40 on expiration, the short put will expire in the money and is worth $500 but this loss is offset by the $500 gain in the short stock position. Thus, the profit is still the initial credit of $200 taken on entering the trade.

However, should the stock rally to $55 on expiration, a significant loss results. At this price, the short stock position taken when XYZ stock was trading at $45 suffers a $1000 loss. Subtracting the initial credit of $200 taken, the resulting loss is $800.

These examples use standard U.S. stock options with a 100-share contract size and matching expiration dates. Related structures can use ETF, index or futures options, but contract multipliers, exercise style, settlement and the underlying price range can differ. A stock’s zero price floor must not be assumed for every futures contract.

Commissions

For ease of understanding, these examples exclude commissions, fees and financing costs. Include all costs when comparing an actual position; there is no universal commission amount.

For active traders, transaction costs can consume a significant part of returns. Compare the full commission and fee schedule, exercise and assignment charges, and bid-ask spreads. The cost of entering and closing every leg matters.

Naked Call Writing

An alternative but similar strategy to writing Covered Puts is to write naked calls. Naked call writing has the same profit potential as the Covered Put write but is executed using call options instead.

Before expiration and assignment

The diagrams and worked outcomes describe expiration payoffs, not an option’s market price before expiration. Time decay, implied volatility, rates, dividends and bid-ask spreads affect early closing values. American-style short options can be assigned early; a protective long option is not automatically exercised when a short leg is assigned. Closing or exercising one leg can change the remaining position’s risk.