COVERED PUT
Overview
Short 100 shares and sell a put to collect additional premium. The put is 'covered' by the short stock. Profit is capped when the stock falls to the put strike and you're assigned. The bearish mirror image of a covered call — but with theoretically unlimited upside loss on the short shares.
What it does
You're combining a bearish short stock position with a short put to collect extra premium income. The sold put is 'covered' by your short shares — if assigned on the put, you buy shares that offset your short position. However, if the stock rallies, the short shares create unlimited upside losses that dwarf any put premium collected. This is a strategy for experienced bearish traders only.
Structure
sell 100 stock + sell 1 put
Setup
- 1.Short 100 shares of stock through your broker.
- 2.Confirm the stock is easy-to-borrow and review margin requirements.
- 3.Sell 1 OTM Put option below the current price.
- 4.Same expiration for the put; set alerts for price and borrow rate changes.
- 5.Be prepared for put assignment — this will close your short stock position.
Max profit
(Short Sale Price − Put Strike + Premium Received) × 100. E.g., ($180 − $175 + $2.30) × 100 = $730.
Max loss
Theoretically unlimited — the stock can rise indefinitely, creating uncapped losses on the short shares.
Breakeven
Short Sale Price + Premium Received. E.g., $180 + $2.30 = $182.30.
When to use
When you're already short a stock and want to collect additional income while the bearish thesis plays out.
When to avoid
Unless you're an experienced trader fully comfortable managing short stock and undefined upside risk.
Example trade
Short 100 shares AAPL at $180 Sell 1 AAPL $175 Put at $2.30 (credit $230) Expiration: 30 days Max Profit: ($180 - $175 + $2.30) × 100 = $730 (if AAPL falls to $175) Breakeven: $180 + $2.30 = $182.30 (on the upside) If AAPL falls to $170: Assigned on put (buy 100 shares at $175), closes short; total profit = $730 If AAPL rises to $195: Loss = ($195 - $180 - $2.30) × 100 = -$1,270
Common mistakes
- ×Underestimating the unlimited upside risk from the short stock — a short squeeze can cause catastrophic losses.
- ×Forgetting dividend obligations — short sellers must pay dividends declared while short.
- ×Over-leveraging by selling a put with too high a strike, increasing put assignment complexity.
- ×Not monitoring borrow fees — rising borrow rates erode the income from the strategy.
- ×Treating this as equivalent to a covered call — the risk profiles are dramatically different.
FAQ
What happens if I'm assigned on the short put?
You must buy 100 shares at the put strike. Since you're already short 100 shares, this closes your short position at the put strike price.
How is this different from a covered call?
A covered call owns stock and sells a call — max loss is stock falling to zero. A covered put shorts stock and sells a put — max loss is unlimited because the stock can rise without bound.