|
Direction |
Bearish |
|
Strategy Type |
Income |
|
Legs |
Short Stock |
| |
Short Put |
|
Max Reward |
Capped |
|
Max Risk |
Uncapped - increases as share price increases |
|
Time Horizon |
Short stock for the long term and sell puts against it on a month basis |
|
Risk Profile |
Speculative |
|
|
|
Payoff Diagram
Description
The covered put is the opposite of the covered Call strategy. A trader shorts the stock and sells puts against the position for a monthly income. If the share price rallies strongly, the trader loses money on the short stock. Although the short put will offset some of this, the risk is a large rally to the upside.
Steps Involved
Short stock for the long term
Sell a put every 4-6 weeks
Roll puts if they are in the money
Rationale
A neutral or slightly bearish market is expected and an income could be made by selling puts repetitively.