← Strategy LabLesson 8 · 4:09
Covered put
Summary
Use a covered put when you are already short the shares, expect a modest drift lower, and want to collect a premium against the short. You short 100 shares at $100 and sell the $95 put for $1.41 a share, so the most you can make is $641, and above $101.41 the loss has no limit. You break even at $101.41.
Key terms
- covered put
- Shorting 100 shares and selling a put against them, which pays a premium but leaves the loss on a rise without a limit.
- shorting
- Borrowing shares, selling them, and hoping to buy them back cheaper later.
- borrowing fees
- What your broker charges you to borrow shares while you are short them.
- margin
- Money your broker holds against what a sold position could lose.
- break-even
- The stock price on the last day where you neither make nor lose money: strike plus premium for a call, strike minus premium for a put.
- gap up
- A jump in a stock's price overnight, for example on a surprise result or takeover offer, before you can act.
Check yourself
Answer each question to see why the right answer is right.
1. You short 100 XYZ at $100 and sell the $95 put for $1.41 a share. What is the most you can make?
2. Where does the covered put break even?
3. XYZ ends at $110 on the last day. What is your result?
4. XYZ ends at $90 on the last day. What is your result?
5. What does shorting 100 shares of XYZ at $100 mean?
Finished the video and the quiz? .