A covered put is a position whereby short stock is paired with a short put. This strategy is also known as the sell-write since the stock is sold and the option is written (sold). The short stock position is bearish, but the short put position is bullish, which neutralizes the short stock below the strike price of the put.
This is a cost basis improvement strategy for a short stock position where the sale of the put brings in premium but simultaneously limits the potential gain of the short stock position.
There is forfeited opportunity in the trade when price falls beneath the strike price of the put, at which point the gains on the short stock are capped. (This is essentially the same effect as that of a covered call position where gains in the long stock are capped beyond the strike price of the short call.)
The risk in this position is on the upside, as there is no hedge against the short stock position with theoretically unlimited losses possible in a rising market.
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