What is a Covered Put?
You profit if the stock falls and lose if the stock rises.
You collect premium but may be assigned and required to buy 100 shares at the strike.
Core structure
| Leg | Action | Example |
|---|---|---|
| 1 | Short Stock | 100 shares at $100 |
| 2 | Sell to Open Put | $90 strike for $3.00 |
Worked example
Assume you short 100 shares at $100 and sell one $90 put for $3.00.
Maximum profit
If the stock falls to or below the put strike, your short-stock profit below $90 is effectively offset by the short put obligation.
Maximum loss
The short stock creates theoretically unlimited loss if the stock rises.
Break-even
If the stock is above $103 at expiration, the overall position is losing money.
Expiration outcomes
| Stock Price | Approximate Result | What Happens? |
|---|---|---|
| $70 | +$1,300 max profit | Short stock gains, but short put offsets profit below $90. |
| $90 | +$1,300 max profit | Short stock gains $1,000 + $300 premium. |
| $100 | +$300 | Stock short is flat; keep put premium. |
| $103 | Break-even | Stock loss offsets put premium. |
| $110 | -$700 | Short stock loses $1,000, partially offset by $300 premium. |
| $130 | -$2,700 | Short-stock loss dominates. |
What happens if the put is assigned?
If the stock is below $90, the put buyer may exercise and you may be assigned to buy 100 shares at $90.
Economically, that is why the position's profit becomes capped below the put strike.
Covered Put vs. Covered Call
| Feature | Covered Put | Covered Call |
|---|---|---|
| Stock position | Short 100 shares | Long 100 shares |
| Option sold | Put | Call |
| Directional bias | Bearish | Neutral to moderately bullish |
| Profit capped | On large downside move | On large upside move |
| Major risk | Stock rises sharply | Stock falls sharply |
Covered Put vs. Cash-Secured Put
| Feature | Covered Put | Cash-Secured Put |
|---|---|---|
| Underlying position | Short stock | Cash reserved |
| Market view | Bearish | Neutral to bullish |
| Assignment result | Shares can close short stock | You become long shares |
| Upside risk | Theoretically unlimited | No unlimited upside risk |
Stock borrow and dividends matter
Because the strategy requires shorting stock, borrow availability and borrow fees can materially affect returns.
Early assignment risk
The short put can be assigned before expiration, especially if it becomes deep in the money.
Pros and cons
- Generates option premium.
- Premium improves the short-stock break-even.
- Assignment can close the short-stock position.
- Useful for a moderately bearish outlook.
- Theoretically unlimited upside loss.
- Requires stock borrow.
- May owe dividend-equivalent payments.
- Downside profit is capped below the put strike.
- Assignment and margin risk.
How to close it
- Buy to Close the short put.
- Buy to Cover the short stock.
- Or allow put assignment to offset the short stock if appropriate.
Common mistakes
- Thinking “covered” means low risk.
- Ignoring theoretically unlimited short-stock upside risk.
- Forgetting borrow fees and dividend obligations.
- Assuming the put premium protects against a large rally.
- Not understanding how assignment interacts with the short shares.
Beginner checklist
| Check | Question |
|---|---|
| ☐ Bearish thesis | Why do I expect the stock to stay flat or decline? |
| ☐ Put strike | At what stock price am I willing to close the short via assignment? |
| ☐ Break-even | What is short-sale price + premium? |
| ☐ Borrow | Are shares available to short, and at what cost? |
| ☐ Dividends | Will I owe dividend-equivalent payments? |
| ☐ Assignment | Can I handle early assignment? |
| ☐ Unlimited risk | Can my account tolerate a sharp rally? |
Key takeaway
It is the bearish counterpart to a covered call. The put premium provides income and improves the break-even, but downside profit is capped while upside loss remains theoretically unlimited.