   6: The Covered Put Strategy Strategy: Covered put Opening the Trade: Sell short 100 shares of stock in company X "Sell to open" a put option on company X Closing the Trade: 1. "Buy to close" a put option with the same strike and expiration 2. Let it expire worthless 3. You get exercised on Summary: You think a stock price will be stable or fall slightly in the near term. So you sell short 100 shares of the company's stock, and sell a put option with a strike price lower than the price you sold short shares. If the stock is about the same price on expiration day, it expires worthless and you get to keep the premium received (which lowers your net cost). If the stock prices rises, you still get to keep the premium but you lost a bit of money on the stock itself. If it falls below your strike price, you keep the premium, but are forced to buy shares (cover your short) at the strike price (regardless of the current market value). Caution! This is an odd one. This is a synthethic short call trade, so see my warnings on the Short Call page. I've never heard of anyone doing this, but this is how its done. The margin requirements are probably onerous, as many brokers will not treat the short stock and short put together as "covered". I don't recommend doing this, as the profit is limited and the risk is truly unlimited. Maximum Profit: The premium received plus the difference between your cost and your strike. Maximum Loss: Unlimited, or very large if the stock rockets higher. Breakeven: You lose money on this trade if the stock price is above your sale price (at the time of the short sale) plus premium received on expiration day.  Figure 1: Sell 1 NOV 60 Covered Put on XYZ Example:
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