Tim Olson
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1.5 KiB
1.5 KiB
description, tags
| description | tags | ||||
|---|---|---|---|---|---|
| A sell-write strategy combining short stock with a short put at strike K, generating income while maintaining a neutral-to-bearish position. |
|
Covered Put
Section: 2.3 | Asset Class: Options | Type: Income
Overview
The covered put (a.k.a. "sell-write") strategy amounts to shorting stock and writing a put option with strike K against the short stock position. The trader's outlook is neutral to bearish. It has the same payoff as writing a naked call and allows the trader to generate income by periodically selling OTM put options while maintaining the short stock position.
Construction
- Short 1 share of stock at price S0
- Sell 1 put option at strike K, receiving net credit C
Net position: short stock + short put
Payoff Profile
f_T = S0 - S_T - (K - S_T)+ + C = S0 - K - (S_T - K)+ + C
- Breakeven: S* = S0 + C
- Max profit: P_max = S0 - K + C (achieved when S_T <= K)
- Max loss: L_max = unlimited (stock can rise without bound)
Key Conditions / Signals
- Neutral to mildly bearish outlook on the underlying
- Elevated implied volatility makes collected premium more attractive
- Suitable for income generation when the trader is comfortable with unlimited upside risk
Notes
The covered put strategy is symmetrical to the covered call strategy. The short stock position carries unlimited loss potential if the stock rises; the collected put premium provides only limited cushion.