Covered Put at a glance
| Construction | Sell short 100 shares of stock and sell 1 put one strike below the money (out of the money) in the front month expiration. |
|---|---|
| Outlook | Bearish |
| Volatility view | Wants falling IV |
| Max profit | Short sale price minus put strike plus put premium, times 100. |
| Max loss | Unlimited. |
| Breakeven | Short sale price plus put premium per share. |
| Experience level | Advanced |
| Also called | Short stock covered put, Married short put |
How a covered put works
You start by borrowing and selling 100 shares, which profits if the stock falls. You then sell a put, which obligates you to buy 100 shares at the strike if assigned. Those purchased shares would close your short, so the put is covered by the short stock in the same way a call is covered by long stock. The premium adds to your profit if the stock drifts lower or sideways, but it also sets a floor below which further declines no longer help you.
At expiration the payoff is flat at its maximum below the put strike: the short sale price minus the strike, plus the premium. Above the strike, the put expires worthless and you hold plain short stock, which loses a dollar for every dollar the stock rises, offset only by the premium. The breakeven is the short sale price plus the premium. The shape matches a naked short call, which is the put call parity equivalent of this position.
Before expiration, the short put decays in your favor and benefits from falling implied volatility. A rally hurts the short stock directly, and the put offers little relief because its value can only shrink to zero. A sharp drop helps the short stock but lifts the put's price, so gains slow as the stock approaches the strike. You also pay any dividends on the borrowed shares and any borrow fees, and those carrying costs reduce your return over time.
Covered Put example with real numbers
With the stock at $100, implied volatility at 30%, a 4.1% risk free rate and no dividend, you would short 100 shares at $100.00, sell 1 97.5 put (32 days) at $2.27. That is a net credit of $10,227. At expiration a maximum profit of $477 and a maximum loss of unlimited, with a breakeven at $102.27. The lognormal chance of profit is 60%.
These are theoretical American option prices from the Bjerksund and Stensland model, not live quotes. Load any ticker in the covered put calculator above to run the same math on real market prices.
When to use a covered put
- You are already short the stock and expect it to drift lower or sideways rather than collapse.
- You want extra income on a short position and are content to cover at the put strike.
- Implied volatility is high and you expect it to fall.
- You have the margin, borrow availability and approval level that short stock and short options require.
Max profit, max loss and breakeven
Maximum profit
Short sale price minus put strike plus put premium, times 100. You reach it when the stock closes at or below the put strike at expiration and assignment on the put covers your short.
Maximum loss
Unlimited. Loss at expiration equals stock price minus short sale price minus put premium, times 100, and it grows without limit as the stock rises.
Breakeven
Short sale price plus put premium per share. Above this price at expiration the covered put loses money.
Covered Put Greeks
- Delta: Delta is negative, close to minus one per share from the short stock, reduced by the positive delta of the short put. As the stock falls below the strike, net delta moves toward zero.
- Gamma: Gamma is negative, coming from the short put. Your bearish exposure shrinks as the stock falls toward the strike, which limits further gains.
- Theta: Theta is positive. The put's time decay adds income each day, though borrow fees on the short shares work against it.
- Vega: Vega is negative. Higher implied volatility raises the put's price and hurts the position, while a volatility decline helps.
See the live numbers for your position in the Greeks tab of the calculator, or explore a single option in the options Greeks calculator.
Early exercise and assignment risk
Early assignment of the short put in a covered put is usually good news. If the stock falls well below the strike and the put goes deep in the money, its holder may exercise early to collect the strike in cash and earn interest on it. When you are assigned, you buy 100 shares per contract at the strike, and those shares close your short. The result is the trade's maximum profit, realized early, and you stop paying borrow fees and dividends from that day forward.
Dividends work against any short stock position. You owe the full dividend to the share lender for every ex dividend date while you are short, and the put's price already reflects the expected drop, so it pays you less. Put holders also tend to wait until after the ex date to exercise, which can keep you short through the payment. Pin risk matters too: if the stock closes near the strike at expiration, you may not know whether your short was covered. Close or roll the put in the final session to remove the doubt.
The calculator's Early exercise risk tab flags short legs that are likely to be assigned. For a single option, use the early exercise calculator or read how early exercise and assignment work.
Pros and cons
Pros
- Adds premium income to an existing short stock position.
- Positive theta rewards a slow decline or a sideways market.
- Early assignment of the put closes the short at the maximum profit.
- Raises the breakeven of the short sale by the premium collected.
Cons
- Unlimited risk if the stock rallies, with only the premium as a cushion.
- Profit is capped at the put strike, so a crash does not pay more.
- Short stock carries dividends, borrow fees, recall risk and margin requirements.
- Requires a margin account and a high options approval level.
How to manage a covered put
- Treat the position as a short stock trade first and set a firm upside stop.
- Buy a call above the market to cap the unlimited risk if a rally looks possible.
- Roll the put down and out after a decline to collect more premium and extend the trade.
- Check ex dividend dates and borrow rates before each cycle, since both erode the return.
Covered Put FAQ
Is a covered put bullish or bearish?
A covered put is mildly bearish. It profits if the stock falls toward the put strike or stays below the short sale price plus the premium. It loses money, without limit, if the stock rallies.
Covered put vs covered call: what is the difference?
A covered put is the bearish mirror of a covered call. The covered call owns stock and sells a call, while the covered put shorts stock and sells a put. A covered call's worst case is the stock going to zero, but a covered put's worst case is unlimited because a stock can rise without limit.
Why is a covered put risky if it is covered?
A covered put is risky because covered only means the put's obligation is matched by the short stock, not that the short stock is protected. If the stock rallies, the short shares lose without limit and the put premium offsets only a small part. Margin calls and share recalls can add pressure at the worst time.
What happens if the put in a covered put is assigned?
If the short put is assigned, you buy 100 shares per contract at the strike, which closes your short stock position. That locks in the maximum profit: the short sale price minus the strike plus the premium. Assignment usually happens when the put is deep in the money with little time value left.
Related strategies
Covered Call
A covered call is a position that owns 100 shares of stock and sells one call option against them to collect premium.
Short Call
A short call, also called a naked or uncovered call, is the sale of a call option without owning the underlying shares.
Short Put
A short put, also called a naked or uncovered put, is the sale of a put option backed by margin rather than the full cash needed to buy the shares.
Synthetic Short Stock
Synthetic short stock is a short call and a long put at the same strike and expiration, a combination that behaves almost exactly like being short 100 shares.
Educational tool, not financial advice. Calculations are theoretical and depend on your inputs; real fills, fees, early assignment and dividends can change results. Options involve risk and are not suitable for every investor.