Covered Put – Fairly Complex Neutral Options Trading Strategy

Check out detailed analysis of Covered Put Options Trading Strategy. This is a complex trading strategy used by advanced traders in the options market.

They are used mainly in Neutral Market conditions.


About Covered Put Options Trading Strategy

The Covered Put it is an excellent and smart trading strategy that makes use of bountiful options to achieve profit.

Further, it is a trading strategy that opts to try various methods, especially the art of profit, if there is any stock with the tag of short sold.

So, it mainly works as a solution where there is a problem with less selling. Moreover, such a strategy ensures there is no compromise in pricing, as the cost doesn’t drop.


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Covered Put Options Strategy – Trader’s View

In addition to this, if a trader expects an unfortunate steep decline in the share price, in such a condition, a trader has no option but to short sell their stock.

Nevertheless, there may also be surprising times when the share market price will probably be stable for a particular period. It means that they will get a neutral viewpoint.

Profit Return on applying Covered Put Trading Strategy

Due to the reason of short positioning, there would not be an option of returning a profit percentage if there’s no price decrease.

Additionally, there is a requirement of alternative actions and make efforts to pile up your bank account. Hence, all these conditions contribute to making us realize the importance of Covered Put!

Such a strategic plan involves options of writing put along with the possibility that these alternatives will offer some good turnout. Also, it comprises writing put options that will expire without any value.

So, what it indicates is we should highlight that this is not some generally used strategy. However, it is a strategy that people must only consider in extremely decisive or accurate circumstances.

So, below are the key points to take from this strategy-

Significant Points

  • One Transaction (Write Puts)
  • Not Apt For Newcomers
  • Neutral Strategy

Further, one question that must be circulating in your brain is, what is a Covered Put? Well, the answer to your question is, it is a neutral strategy.


The Necessity of Covered Put Options Strategy

Covered Put is defined as a neutral strategy as its fundamental aim is to attempt and make a profit out of stock that does not move and will be stable considering price for some time.

Moreover, the strategy would be in use if people have or are in the position of the short open stock. Also, one can use it if you believe that the cost of the relevant and appropriate stock is in a state of going through a stability period and possibly will not move.

Thus in such a condition, one can close their open short stock position; however, if you wish to keep this position open, the theory is that it will fall considering long term plans.

Further, the covered put strategy provides people with not-so-good protection if the short stock’s cost rises abruptly.


Find out other Neutral Option Trading Strategy here

Calendar StraddleIron Condor SpreadShort Straddle
Covered CallShort StrangleCall Ratio Spread
Butterfly SpreadAlbatross Spread

Implementation of Covered Put Options Strategy

To put into action, the covered out strategy; it is a simple and straightforward process.

One needs to write essential puts (making use of sell for opening order) for covering the stock amount that you are left with short sold.

Also, one will require two significant and essential decisions. These decisions are:

  1. To use what date of expiration.
  2. To use what type of strike.

These two specific decisions are eventually dependent on what are your expectations, what are the achievements that you wish to have.

Moreover, one must use the date of expiration that is relevant for how much time you believe the stock will continue to be in the state of stability. Additionally, if you believe it will attain stability for a long and tedious time, you must write contracts.

You should write these contracts considering in mind the long run expiration date. So, if one expects that will remain constant for a shorter period only, then the idea of a short-term expiration date is the best and the right one, in order to avoid difficulties.

Talking about the strike, on the whole, we would recommend you to write contracts in general. These contracts include plenty of money, or they run out of wealth.

Furthermore, one can make usage of a lower strike as per their wish. Nonetheless, you will get lesser credit, and also those specific contracts will be quite cheap.

So, below you will witness how and when one might use a strategy of covered Put.


About Starting Point & Stability

One can have short-selling of 100 shares of any company naming, X stock, that is presently trading for Rs.50. Thus, we refer to this price as the “Starting Point.”

You think that a price stock will continue to be comparably constant for a shorter time. Also, one wishes to make efforts and have profit from such stability.

People can write one put options contract where every contract comprises 100 put options. These options are way out of money (let’s say Rs.49 strike & in the end, it will expire in the following month having the total credit of Rs.150. It means the net profit of Rs.1.50/put option).


Find out more relevant Neutral Option Trading Strategy below

Condor SpreadCalendar Put SpreadIron Albatross Spread
Calendar Call SpreadShort GutCovered Call Collar
Put Ratio SpreadIron Butterfly SpreadCalendar Strangle

Possible Profits & Losses in Covered Put Strategy

A perfect scenario for people is, let’s suppose when the price falls out from Rs.50 to Rs.49, it will offer you a Rs.1 profit/share that says you are having a short sold.

Also, it indicates that the puts you have written will expire worthlessly. The final credit of Rs.150 you receive to write those puts will have a wholesome profit of Rs.Rs.50.

Moreover, it is the most profit, one will receive though. It is because, if the price further falls, any new profit one will make in the short stock from an original position will be outweighed by covered puts options that one has written.

Further, let’s say if the pricing reaches below Rs.49, then the puts will step into wealth. Also, it could be selected and given responsibility, which would force anyone to purchase the stock at the strike of Rs.49.

Also, one would make a huge profit if the cost lasts long at Rs.50 exactly. Or else, the profit will be there when the price drops to somewhere between Rs.49 & Rs.50. So, the profit would expire without any value and give you the profit mark of Rs.150 credit.

The biggest and ultimate risk in this strategy is that price can increase or multiply by a significant amount.

If such a condition occurs, the short stock position of yours will begin losing your precious money. There will be offset (balance or compensation) by acknowledging Rs.150 credit to write the puts.

Remember, these puts will have a sudden expiration date as they will expire worthlessly at any particular time when the share price goes above Rs.49.

However, if the market of share price rises rapidly and adequately, it would only cover your partial losses. You can conclude the potential losses plus profits as:

Quick Summation of Potential Losses and Profits

  1. Making maximum profit when – “The Strike of Options” equals “The Price of Underlying Stock.”
  2. One can also make a profit when – “Starting Point” is greater or equal to “The Price of Underlying Stock; however, or is lesser than the “Strike of Options.”
  3. Calculation of profit is not applicable when the “Strike of Options” is greater than “Price of Underlying Stock.”
  4. The Break-Even Point is, “Price of Option” +” Starting Point” = “Price of Underlying Stock.”
  5. Profit/short sold sharing if “Price of Underlying Stock” is lesser than the “Strike of Options”. Also, the “Strike of Options” = “Price Per Option + (Starting Point – Strike of Options).
  6. Profit earned for each short sold share is, “Price of Options + (Starting Point – Price of Underlying Security).
  7. Unlimited losses occur when an underlying stock shifts above the point of Break-Even.
  8. Losses occurring for each short sold share exists as, “Price of Underlying Stock” – (Price of Option + Starting Point).

As per the suggestion of some experts, profits that you make while there’s a downfall in the stock price or losses occurring from a price hike should not be included. The reason behind it is those losses or profits you will face or made from the authentic position.

Nevertheless, we have the inclusion of profits and losses as there is no difficulty in making the calculations.

Also, it will be easier to make accurate calculations for the entire position. On the contrary, the calculations do not involve any loss or profit when it’s finished on the original position.

Also, they do not even consider the commission costs.


Covered Put Options Trading Strategy – Conclusion

In a nutshell, you can conclude that the covered put strategy is an efficient way of achieving maximum profit. You can earn this profit when you are in the short stock position.

Nevertheless, it has the power to put handcuffs on your potential profits. Also, it works on offering only highly limited protection.

All in all, this trading strategy must be considered only when you’re confident enough about the share price.

Also, consider it when you have self-satisfaction about the share price that will be comparably neutral for an appropriate time.


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