Covered Put
An options strategy that pairs a short stock position with a short put option to generate income or set a buy-back price.
What is Covered Put?
A covered put is an options strategy involving a short position in an underlying stock combined with a short (sold) put option on the same stock. It is the bearish mirror image of the covered call. The premium collected from selling the put provides immediate income and creates an obligation to buy the stock at the put's strike price if the stock falls below that level and the option is exercised. This makes the covered put a way for a bearish trader to define the price at which they would close their short position while collecting premium. The strategy has limited profit potential (premium plus the fall in stock price to zero) but significant loss exposure if the stock rises sharply, as both the short stock and short put lose money in a rally.
Example
A trader shorts 100 shares of a stock at $60 and sells a $55 put for $2.00. The premium of $200 is immediately collected. If the stock falls to $55 or below, the put is exercised and the trader buys 100 shares at $55, closing the short for a $5 gain plus $2 premium, totaling $700. If the stock rises sharply to $80, the short stock loses $20 per share while the short put loses additional value — a significant combined loss.