Covered Put Writing

| December 8, 2011 | 0 Comments

To no surprise, a covered put is the exact opposite of a covered call.

A covered call is the purchase of stock and the sale of a call option.  A covered put is the sale of stock (short stock) with the sale of a put option.

Why would you put this type of position on?

Simply… if you like the idea of covered call writing, however you are market bearish.  Meaning you think the market is going to decrease in value and you like to short stock.  However, you sell a put for extra income and/or for protection.  In this case this is protection against a rise in the stock price.

For instance… you short 100 shares of Microsoft for $25.  Then, you immediately sell one Microsoft April $20 put option for $5 per share.

Now what?

If Microsoft trades up to $30 per share at expiration, you lose $5 a share on your stock position.  However, the put option you sold expires worthless and you keep the $5 premium.  You just broke even.

Next.. your Microsoft stock stays right at $25.  Now, you keep your stock for $25 a share.  Again, the put you sold expires worthless and you keep your $5 premium.  This leaves you short 100 shares of Microsoft at an adjusted price of $30 ($25 plus $5 premium).

Category: Options Trading Strategies

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.
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