{"id":175930,"date":"2021-03-02T18:29:00","date_gmt":"2021-03-02T23:29:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/trading-lessons\/bear-market-covered-put\/"},"modified":"2023-12-20T11:10:24","modified_gmt":"2023-12-20T16:10:24","slug":"bear-market-covered-put","status":"publish","type":"trading-lessons","link":"https:\/\/www.interactivebrokers.com\/campus\/trading-lessons\/bear-market-covered-put\/","title":{"rendered":"Bear Market \u2013 Covered Put"},"content":{"rendered":"<p>A covered put would be considered by someone who would like to derive additional income from a short stock position.\u00a0 A covered put allows the investor to hold a short equity position while simultaneously receiving the premium from selling an equal amount of put options against it. The covered put writer is bearish on the stock\u2019s long-term potential but is willing to forego a stock\u2019s downside below the strike during the life of the option in order to receive the proceeds of the put premium.\u00a0 The covered put writer benefits from time decay, from a reduction in volatility and if the stock decreases its dividend before expiration.\u00a0 It should be noted that the combined position has a similar profile to that of a short call.\u00a0 The covered put writer remains exposed to any upside in the underlying shares, meaning his loss potential is unlimited.<\/p>\n<p>Market Outlook &#8211; Mildly Bearish<\/p>\n<p>Volatility View &#8211; Premium decreases<\/p>\n<p>Time Erosion &#8211; Helps<\/p>\n<p>Dividends &#8211; Premium decreases<\/p>\n<p>Interest Rate &#8211; Premium increases<\/p>\n<p>Profit Potential &#8211; Limited to gains from short equity down to the strike price, plus premium received from the sale of put option<\/p>\n<p>Loss Potential &#8211; Unlimited to upside movement in the equity minus the premium received from the sale of put option<\/p>\n<p>Components &#8211; Short equity, short put option<\/p>\n<p><strong>Covered Put Example: <\/strong><\/p>\n<ul>\n<li>Underlying XYZ stock price: $40.00<\/li>\n<li>Put strike price:37.50<\/li>\n<li>Put option premium:$2.00<\/li>\n<li>Days to expiration:90<\/li>\n<li>Breakeven:40.00+$2.00=$42.00 (underlying share purchase price <em>plus<\/em> premium received for put option)<\/li>\n<li>Profit potential: Limited to the fall in the underlying share price until the strike price is reached, plus the premium received from the sale of the put option. Thereafter, short gains from the stock are equally offset by the rising cost of the short put option.<\/li>\n<li>Potential profit:@$37.50 \u2013 The sum of the decline in the stock price ($40.00 &#8211; $37.50 = $2.50) <em>plus <\/em>the premium of $2.00 received from the sale of the put for a total of $4.50.<\/li>\n<li>@$35.00 \u2013 The strike price marks the maximum potential profit from the strategy. The gain on the short stock of $5.00 is added to the premium of $2.00 received from the sale of the put. However, the put has $2.50 intrinsic value when the option expires with the stock at $35.00. At any point below the strike price at expiration, what the investor gains from the declining stock, he loses penny-for-penny on the short put option. In this case the net loss from the option ($2.00 received <em>less<\/em> its $2.50 value at expiration) is $0.50c and is subtracted from the gain of $5.00 on the short stock. Hence the maximum potential gain from the strategy is always $4.50.<\/li>\n<li>@$44.00 \u2013 At any price above the put strike the option expires worthless and the investor keeps the entire premium. However, the stock has risen by $4.00 per share. That loss is partially offset by the premium received from the sale of the put option. So, the overall loss at $44.00 per share is $4.00 &#8211; $2.00 or $2.00.<\/li>\n<li>Maximum loss: Unlimited by the fact that the stock can continue to rise. However, the investor starts to lose money at the share purchase price <em>plus<\/em> the premium received ($40.00 plus $2.00 = $42.00) and continues to lose penny-for-penny as the share price increases further.<\/li>\n<\/ul>\n<table width=\"631\">\n<tbody>\n<tr>\n<td width=\"89\">Underlying Stock<\/td>\n<td width=\"89\">\u00a0$\u00a0\u00a0 40.00<\/td>\n<td width=\"16\"><\/td>\n<td width=\"123\">Underlying Stock<\/td>\n<td width=\"112\">Put Profit &amp; Loss<\/td>\n<td width=\"95\">Stock P&amp;L<\/td>\n<td width=\"107\">Total<\/td>\n<\/tr>\n<tr>\n<td width=\"89\">Short Put Strike<\/td>\n<td width=\"89\">\u00a0$\u00a0\u00a0 37.50<\/td>\n<td width=\"16\"><\/td>\n<td width=\"123\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 10.00<\/td>\n<td width=\"112\">\u00a0$\u00a0\u00a0\u00a0\u00a0 (2,550.00)<\/td>\n<td width=\"95\">\u00a0$\u00a0 3,000.00<\/td>\n<td width=\"107\">\u00a0$\u00a0\u00a0\u00a0\u00a0 450.00<\/td>\n<\/tr>\n<tr>\n<td width=\"89\">Premium<\/td>\n<td width=\"89\">\u00a0$\u00a0\u00a0\u00a0\u00a0 2.00<\/td>\n<td width=\"16\"><\/td>\n<td width=\"123\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 20.00<\/td>\n<td width=\"112\">\u00a0$\u00a0\u00a0\u00a0\u00a0 (1,550.00)<\/td>\n<td width=\"95\">\u00a0$\u00a0 2,000.00<\/td>\n<td width=\"107\">\u00a0$\u00a0\u00a0\u00a0\u00a0 450.00<\/td>\n<\/tr>\n<tr>\n<td width=\"89\"><\/td>\n<td width=\"89\"><\/td>\n<td width=\"16\"><\/td>\n<td width=\"123\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 25.00<\/td>\n<td width=\"112\">\u00a0$\u00a0\u00a0\u00a0\u00a0 (1,050.00)<\/td>\n<td width=\"95\">\u00a0$\u00a0 1,500.00<\/td>\n<td width=\"107\">\u00a0$\u00a0\u00a0\u00a0\u00a0 450.00<\/td>\n<\/tr>\n<tr>\n<td width=\"89\"><\/td>\n<td width=\"89\"><\/td>\n<td width=\"16\"><\/td>\n<td width=\"123\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 30.00<\/td>\n<td width=\"112\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (550.00)<\/td>\n<td width=\"95\">\u00a0$\u00a0 1,000.00<\/td>\n<td width=\"107\">\u00a0$\u00a0\u00a0\u00a0\u00a0 450.00<\/td>\n<\/tr>\n<tr>\n<td width=\"89\"><\/td>\n<td width=\"89\"><\/td>\n<td width=\"16\"><\/td>\n<td width=\"123\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 35.00<\/td>\n<td width=\"112\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (50.00)<\/td>\n<td width=\"95\">\u00a0$\u00a0\u00a0\u00a0\u00a0 500.00<\/td>\n<td width=\"107\">\u00a0$\u00a0\u00a0\u00a0\u00a0 450.00<\/td>\n<\/tr>\n<tr>\n<td width=\"89\"><\/td>\n<td width=\"89\"><\/td>\n<td width=\"16\"><\/td>\n<td width=\"123\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 37.50<\/td>\n<td width=\"112\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 200.00<\/td>\n<td width=\"95\">\u00a0$\u00a0\u00a0\u00a0\u00a0 250.00<\/td>\n<td width=\"107\">\u00a0$\u00a0\u00a0\u00a0\u00a0 450.00<\/td>\n<\/tr>\n<tr>\n<td width=\"89\"><\/td>\n<td width=\"89\"><\/td>\n<td width=\"16\"><\/td>\n<td width=\"123\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 40.00<\/td>\n<td width=\"112\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 200.00<\/td>\n<td width=\"95\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 &#8211;<\/td>\n<td width=\"107\">\u00a0$\u00a0\u00a0\u00a0\u00a0 200.00<\/td>\n<\/tr>\n<tr>\n<td width=\"89\"><\/td>\n<td width=\"89\"><\/td>\n<td width=\"16\"><\/td>\n<td width=\"123\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 45.00<\/td>\n<td width=\"112\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 200.00<\/td>\n<td width=\"95\">\u00a0$\u00a0\u00a0\u00a0 (500.00)<\/td>\n<td width=\"107\">\u00a0$\u00a0\u00a0\u00a0 (300.00)<\/td>\n<\/tr>\n<tr>\n<td width=\"89\"><\/td>\n<td width=\"89\"><\/td>\n<td width=\"16\"><\/td>\n<td width=\"123\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 50.00<\/td>\n<td width=\"112\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 200.00<\/td>\n<td width=\"95\">\u00a0$(1,000.00)<\/td>\n<td width=\"107\">\u00a0$\u00a0\u00a0\u00a0 (800.00)<\/td>\n<\/tr>\n<tr>\n<td width=\"89\"><\/td>\n<td width=\"89\"><\/td>\n<td width=\"16\"><\/td>\n<td width=\"123\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 55.00<\/td>\n<td width=\"112\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 200.00<\/td>\n<td width=\"95\">\u00a0$(1,500.00)<\/td>\n<td width=\"107\">\u00a0$(1,300.00)<\/td>\n<\/tr>\n<tr>\n<td width=\"89\"><\/td>\n<td width=\"89\"><\/td>\n<td width=\"16\"><\/td>\n<td width=\"123\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 60.00<\/td>\n<td width=\"112\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 200.00<\/td>\n<td width=\"95\">\u00a0$(2,000.00)<\/td>\n<td width=\"107\">\u00a0$(1,800.00)<\/td>\n<\/tr>\n<tr>\n<td width=\"89\"><\/td>\n<td width=\"89\"><\/td>\n<td width=\"16\"><\/td>\n<td width=\"123\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 70.00<\/td>\n<td width=\"112\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 200.00<\/td>\n<td width=\"95\">\u00a0$(3,000.00)<\/td>\n<td width=\"107\">\u00a0$(2,800.00)<\/td>\n<\/tr>\n<tr>\n<td width=\"89\"><\/td>\n<td width=\"89\"><\/td>\n<td width=\"16\"><\/td>\n<td width=\"123\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 80.00<\/td>\n<td width=\"112\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 200.00<\/td>\n<td width=\"95\">\u00a0$(4,000.00)<\/td>\n<td width=\"107\">\u00a0$(3,800.00)<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n","protected":false},"excerpt":{"rendered":"<p>An investor might be bearish on the outlook for a stock, but may wish to generate income by standing ready to have the stock put to him using the covered put strategy.<\/p>\n","protected":false},"author":850,"featured_media":221415,"parent":0,"comment_status":"open","ping_status":"closed","template":"","meta":{"_acf_changed":false,"footnotes":""},"contributors-categories":[13576],"traders-academy":[13126,13128,13132],"class_list":{"0":"post-175930","1":"trading-lessons","2":"type-trading-lessons","3":"status-publish","4":"has-post-thumbnail","6":"contributors-categories-interactive-brokers","7":"traders-academy-intermediate-trading","8":"traders-academy-level","9":"traders-academy-trading-lesson"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v27.3) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Archives | Traders&#039; Academy | IBKR Campus<\/title>\n<meta name=\"description\" content=\"An investor might be bearish on the outlook for a stock, but may wish to 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