Long Covered Put
A long covered put is an options strategy that is used an insurance for an already existing trade. The trader buys stock, and then buys a single put contract, and then waits for the stock trade to go into profit, by an amount that covers the options premium (the cost of the put). If the stock price moves up enough, the stock would be sold to realize its profit, and the put contract could then also be sold to retrieve some of the original premium. If the price moved down (against the stock trade), the put would be exercised, and the stock would be sold at the strike price, which may or may not cover the options premium, depending upon the difference between the price at which the stock was bought, and the strike price of the put.
Making a Long Covered Put
- Purchase the underlying stock
- Purchase a single put contract
- Wait for the price to move above the strike price plus the long put premium
- Sell the underlying stock
- Sell the put to retrieve some of the premium
Risk and Reward
As shown on the risk / reward chart (view the full size chart), the risk of a long covered put is low, and is limited to the long put premium regardless of how far the price moves down (against the stock trade). The risk of a long covered put is calculated as :
Maximum Risk = Premium
Loss = Premium - Stock trade profit
The reward of a long covered put is potentially unlimited, as the price could move up (with the trade) by any amount. The profit of a long covered put is calculated as :
Maximum Profit = Unlimited
Profit = Stock trade profit - Premium
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