Covered Put

The position pairs a short in the underlying with a single sold put, so the premium offsets part of the short's cost.

Enter the short and the sold put together so the premium is locked against a known short price. Selling the put first and shorting later leaves you exposed to a gap in between.

Exit by buying back both legs, or let a put that is in the money get assigned so the short is closed at the strike. Many traders simply close the whole structure once most of the premium has decayed rather than carrying it to the last day.

Define the upside stop before entering. Because the loss is open ended, a hard stop on the underlying, for example buying back the short if it rallies through a set level, is what keeps a covered put from turning into a large uncapped loss.

Theta works for you here. The sold put is a short option, so its time value erodes in your favour every day the underlying stays above the strike, and that decay speeds up in the final weeks.

This is why the strategy is framed as income. In a flat or slowly falling market the put quietly bleeds value, and you keep the premium. The catch is that the same slow grind offers no protection at all if the underlying spikes upward.

The position is net short volatility through the sold put, so falling implied volatility helps and rising IV hurts. Selling the put when IV is elevated collects a richer premium for the same strike.

Because a rally is the real danger, be cautious about holding a covered put through events that can send the underlying sharply higher, such as strong results or a takeover rumour. The volatility crush after the event helps the option, but the price gap can overwhelm it.

If the underlying falls toward your put strike and you want to keep the position bearish, you can roll the put down and out: buy back the current put and sell a lower strike in a later expiry to reset the profit zone.

If the underlying rallies against you, the disciplined repair is usually to cut the short rather than to add more risk. Selling additional puts to average the position simply increases exposure to the very move that is hurting you.

To cap the upside risk entirely, you can buy a call above the market, which converts the open ended loss into a defined one. That turns the trade into a different, fully hedged structure and gives up some premium for peace of mind.

A covered put is the bearish mirror of a covered call, and its payoff matches a short call at the same strike. Both collect premium, cap the profit, and carry an open ended risk on the wrong side.

Adding a further out long call converts the open ended upside risk into a defined one, turning the position into a fully hedged structure.