Options Trading Strategies: Covered Put
Covered put is a two legged strategy that includes a short position on the underlying asset and a sold put.
When to use this strategy?
You are neutral to bearish and want to earn some extra income by selling a put. If you want to make profit from the sold put premium, you will expect the option to expire worthless. When you are moderately bearish, a premium from a sold put is used to subsidize the cost of shorting the BTC/ETH if the price rises.
Below is a Profit and Loss chart example of a long put options strategy:
Pros:
Same as covered call, you can sell puts against your short position on BTC/ETH frequently and generate a regular income.
Cons:
Just as the short call, which has an equivalent payoff profile, shorting BTC/ETH is risky because the potential loss is unlimited if the price of the underlying asset rises above the breakeven, and the maximum gain is capped.
Example:
In this example, BTC is trading at 43,357.86 USD. You have shorted a BTC at 43,429.50 USD and sold a putwith a strike price of 42,000.00 USD, with an expiration date of March 4th 2022, and for a premium of 144.98USD.
The Profit and Loss chart looks as at the picture below:
Upon expiration:
If the BTC price is higher than the strike price, the option will expire worthless and you are starting to make loses.
On the contrary, if the BTC price is lower than the strike price, the option will be exercised. In this case you will profit, as the covered put strategy involves a short BTC component.
| BTC at Expiry (USD) | Payoff (USD) |
|---|---|
| 42,000.00 (strike price) | +1,574.48 (max gain) |
| 42,221.00 | +1,353.48 |
| 42,717.00 | +857.48 |
| 43,308.00 | +266.48 |
| 43,574.48 (break even) | 0 |
| 43,789.00 | -214.52 |
| 44,030.00 | -455.52 |
| 44,377.00 | -802.52 |
| 44,684.00 | -1,109.52 |