Strategy

Covered put

Put-Write

Type of Strategy

trading / investing

sentiment

bearish / neutral

implied volatility

high

example

{OTM CP}:  XYZ at $45.  Sell a 45-DTE $45 Put for $2.

boundaries

max loss = unlimited     

max profit = $2 ($45-$45+$2) 

Breakeven = $47     (underlying + credit recvd)

description

While holding a short underlying stock position, sell a put option against the shares.  The put sold can be ITM, ATM, or OTM based on seller’s intent.  The term “Put-Write” is often used for a covered put when the put is sold concurrent to the equity sale.

Set-Up

While holding a short equity position, sell a put option against the shares that effectively limits the realized price depreciation of the stock.  Generally, covered puts are written ATM or OTM.  Selling covered puts does not add risk to the investment.  Rather, the risk profile is diminished by the value of the put sold.

Soi perspective

Covered puts (put-writes) are synthetic equivalent positions to writing naked call options.  Both strategies offer a limited profit potential, betting against the stock’s appreciation, with an unlimited downside potential.  For this reason, SOI strongly recommends against put-writes, short naked call options, and shorting stock positions in general.

SOI finds the limited profits available in relation to the an unlimited downside potential are simply not justified.

The Q1-2021 Reddit gamma-squeeze plays on a number of stocks, most notably GME, provide a canvas that portray the potential damage that can be inflicted in such positions.  Our philosophy hinges on better opportunities available than taking such a position. 

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