Covered Put – Option Trading Strategy

Cole Turner

A covered put is an option strategy where an investor writes a put option while shorting the shares of the underlying stock.

The covered put can be used when an investor is trying to increase his profits from shorting the underlying stock or when he is protecting his short position against a slight rise in the price of the underlying stock. This article will give investors a better understanding of this effective option strategy.

An investor who uses the covered put has a neutral to slightly bearish sentiment on the underlying stock.

The maximum profit an investor gains from this strategy is equal to the premium received for the option sold. Therefore, the potential gain is limited.

On the other hand, the potential loss is unlimited. In the worst-case scenario, the stock price expires above the strike price. If this happens, the investor is left with a short stock position while the price of the stock is rising. Since there is no limit on how much the stock could rise, the potential loss is unlimited.

Let’s look at an example of this strategy.

Assume stock ABC is trading at $30. An investor writes a covered put by selling a put option with a strike price of $30 that expires in a month. He receives a premium of $200, which is his potential maximum profit. At the same time, he shorts 100 shares of ABC stock.

At expiration in one month, if ABC is still trading at $30, then the put option will expire worthless. The option seller will cover his short position with no loss and will walk away with a profit of $200.

If ABC falls to $27 at expiration, then the put option would be exercised. If this happens, the option seller is obligated to buy the shares of stock at $30 rather than $27. That is a $300 loss. However, he also shorted the stock at $30. From that, he made a $300 gain. The $300 loss from the option is offset by the $300 gain in the short position. The investor walks away with a profit of $200 because of the premium paid to him.

If the stock rises in price to $35 at expiration, then the option seller is going to incur a loss. The short stock position will suffer a loss of $500. However, the option seller is gaining $200 from the premium. In total, the option seller is going to lose $300.

These are the possible results for a covered put strategy. The best result occurs when the underlying stock price remains relatively neutral.

If an investor feels that a stock price is going to remain neutral over a certain time period, then using the covered put is a great strategy to earn a small profit.

share on:

Like This Article?
Now Get Mark's FREE Special Report:
3 Dividend Plays with Sky-High Returns

This newly-released report by a top-20 living economist details three investments that are your best bets for income and appreciation for the rest of the year and beyond.

Get Access to the Report, 100% FREE

share on:


Dr. Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

Product Details

  • Forecasts & Strategies
  • Home Run Trader
  • Fast Money Alert
  • Five Star Trader
  • TNT Trader

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Product Details

  • Cash Machine
  • Premium Income PRO (exclusively for subscribers of Cash Machine)
  • Quick Income Trader
  • Breakout Options Alert
  • Hi-Tech Trader

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker,
financial journalist, and money manager. As well as a book author and regular contributor to
numerous investment websites, Jim is the editor of:

Product Details

  • Successful Investing
  • High Velocity Options
  • Intelligence Report
  • Bullseye Stock Trader
  • Eagle Eye Opener

Bob Carlson

Bob Carlson provides independent, objective research covering all the financial issues of retirement and retirement planning. In addition, Bob serves as Chairman of the Board of Trustees of the Fairfax County (VA) Employees’ Retirement System, which has over $2.8 billion in assets.

Product Details

  • Retirement Watch
  • Retirement Watch Spotlight Series
  • Lifetime Retirement Protection Program

Jon Johnson

Jon Johnson's philosophy in investing and trading is to take what the market gives you regardless if that is to the upside or downside. For the past 21 years, Jon has helped thousands of clients gain success in the financial markets through his newsletters and education services:

Product Details

  • Investment House Daily
  • Stock of the Week
  • Technical Traders Alert
  • Rapid Profits Stock Trader

Used by financial advisors and individual investors all over the world, is the premier provider and one-stop shop for dividend information and research.

Product Details

Popular tools include our proprietary Dividend Calendar, Dividend Calculator, Dividend Score Card, and many more.

  • Dividend Investor

George Gilder

George Gilder is the most knowledgeable man in America when it comes to the future of technology and its impact on our lives.  He’s an established investor, bestselling author, and economist with an uncanny ability to foresee how new breakthroughs will play out, years in advance.

Product Details

  • Technology Report
  • Technology Report PRO
  • Moonshots
  • Private Reserve
  • Millionaire Circle


DayTradeSPY was founded by head trader Hugh Grossman, a retired internal auditor for a Fortune 500 company. After years of first-hand experience trying out one trading strategy after another, Hugh instead developed his own trading system centered around day trading SPY options. That’s it... Nothing else.

Product Details

  • Trading Room
  • Pick of the Day
  • Inner Circle
  • Online Workshops