Tim Olson
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33 lines
1.5 KiB
Markdown
33 lines
1.5 KiB
Markdown
---
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description: "A sell-write strategy combining short stock with a short put at strike K, generating income while maintaining a neutral-to-bearish position."
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tags: [options, income, covered, bearish]
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---
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# Covered Put
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**Section**: 2.3 | **Asset Class**: Options | **Type**: Income
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## Overview
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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.
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## Construction
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- Short 1 share of stock at price S0
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- Sell 1 put option at strike K, receiving net credit C
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Net position: short stock + short put
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## Payoff Profile
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f_T = S0 - S_T - (K - S_T)+ + C = S0 - K - (S_T - K)+ + C
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- Breakeven: S* = S0 + C
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- Max profit: P_max = S0 - K + C (achieved when S_T <= K)
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- Max loss: L_max = unlimited (stock can rise without bound)
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## Key Conditions / Signals
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- Neutral to mildly bearish outlook on the underlying
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- Elevated implied volatility makes collected premium more attractive
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- Suitable for income generation when the trader is comfortable with unlimited upside risk
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## Notes
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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.
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