COVERED PUT OPTIONS STRATEGY

I wrote and discussed this strategy as one of forum member (http://options.forum2u.org/) asking whether this strategy is good or not compared to Covered Call Strategy. Well, actually Covered Put strategy is just the opposite of the Covered Call Strategy...... it is a BEARISH STRATEGY. What you do is you sell SHORT the Stock to cover the Put that is written. Below is the comparison:

Covered Put Covered Call
Short the Stock Buy the Stock
Collect prem on write PUT Collect prem on write CALL
If assigned, deliver stock If called, deliver stock owned


The Covered Put is a neutral to Bearish strategy. So, the investor is expecting the stock to go down or stay constant. When the stock goes down, the Sell Put position will be assigned and and this covers the obligation of the shares of stock that were shorted (just like in the case of Covered Call where the owned stock is delivered for an exercise when the stock go up).

Investor will keep the Collected Premium and this premium is a cushion if stock goes up. However, it only covers the amount of premium and if stock is rallying, the LOSS will be maximum (due to Short Stock Position).

Despite this strategy is quite the same with Covered Call (just opposite), personally I do not suggest this strategy. Because we have MAXIMUM LOSS when stock goes up and as you know, there is no limit stock can go up. The potential loss is very enormous if this strategy is taken by an amateur/beginner (no tight cut loss).

It is different with Covered Call, when the stock goes down, investor always know that they hold a good/bluechip stock. And this is a good cushion that stock will not go down as big as market and can rebound very easily.