I have been trading for some time but I still do not get covered puts. I know about regular puts but this one seems more complicated.
How does it really work? I read about it but the explanations are difficult. I want to grasp this before I try it.
Tried covered puts on a tech stock where I shorted shares first, then sold a put. Expected it to drop but it climbed and I lost $800.
The premium from the put can cushion losses if the stock rises. But the margin requirements were brutal and made the strategy feel much trickier than regular puts.
Covered puts are about getting some income while you short a stock. You short 100 shares, hoping the price will drop, and sell a put option giving someone else the right to sell you 100 more shares at a specific price.
The premium from the put can help soften the blow if the stock rises instead of falls. But you have to buy those shares if the put is exercised, which happens if the stock goes below the strike price.
In reality, it can be tough to profit due to the costs of borrowing shares and margin requirements. You need a clear plan for it to work out.
Premium collected offsets some short position losses when stock moves up.
Risk profile:
• Limited profit potential
• Unlimited loss exposure
• High margin requirements
Most traders avoid due to poor risk/reward ratio.
Shorting 100 shares lets you sell a put option against them.
Covered puts work opposite to covered calls. Selling a put option while shorting the underlying stock is the key.
The short position covers the obligation if the put is exercised. You receive premium from selling the put, providing downside protection for your short.
Many avoid this strategy due to the risks and costs of shorting stocks. Losses can be significant if the stock price rises.