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Short Put Vs Covered Call Options Trading Strategy Comparison

Compare Short Put and Covered Call options trading strategies. Find similarities and differences between Short Put and Covered Call strategies. Find the best options trading strategy for your trading needs.

Short Put Vs Covered Call

  Short Put Covered Call
Short Put Logo Covered Call Logo
About Strategy A short put is another Bullish trading strategy wherein your view is that the price of an underlying will not move below a certain level. The strategy involves entering into a single position of selling a Put Option. It has low profit potential and is exposed to unlimited risk. A short put strategy involves selling a Put Option only. For example if you see that the shares of a Company A will not move below Rs 1000 then you sell the Put Option of that stock at Rs 1000 and receive the premium amount. The premium received will be the maximum profit you can earn from this trade. However, if the price of the underlying moves below 1000 then you will incur unlimited losses. A Covered Call is a basic option trading strategy frequently used by traders to protect their huge share holdings. It is a strategy in which you own shares of a company and Sell OTM Call Option of the company in similar proportion. The Call Option would not get exercised unless the stock price increases. Till then you will earn the Premium. This a unlimited risk and limited reward strategy. Let's assume you own TCS Shares and your view is that its price will rise in the near future. You will Sell OTM Call Option of TCS at a price, where you target to sell your shares. You will receive premium amount for selling the Call option and the premium is your income.
Market View Bullish Bullish
Strategy Level Beginners Advance
Options Type Put Call + Underlying
Number of Positions 1 2
Risk Profile Unlimited Unlimited
Reward Profile Limited Limited
Breakeven Point Strike Price - Premium Purchase Price of Underlying- Premium Recieved

When and how to use Short Put and Covered Call?

  Short Put Covered Call
When to use?

Short Put works well when you're Bullish that the price of the underlying will not fall beyond a certain level.

The covered call option strategy works well when you have a mildly Bullish market view and you expect the price of your holdings to moderately rise in future.

Market View Bullish

When you are expecting the price or volatility of the underlying to increase marginally.

Bullish

When you are expecting a moderate rise in the price of the underlying or less volatility.

Action
  • Sell Put Option

A short put strategy involves selling a Put Option only. So if you see that the shares of a Company A will not move below a 1000 then you sell the Put Option of that stock at 1000 and receive the premium amount. The premium received will be the maximum profit you can earn from this deal. However, if the price of the underlying moves below 1000 than you will incur losses.

  • Buy Underlying
  • Sell OTM Call Option

Let's assume you own TCS Shares and your view is that its price will rise in the near future. You will Sell OTM Call Option of TCS at a price, where you target to sell your shares. You will receive premium amount for selling the Call option and the premium is your income.

Breakeven Point Strike Price - Premium
Purchase Price of Underlying- Premium Recieved

Compare Risks and Rewards (Short Put Vs Covered Call)

  Short Put Covered Call
Risks Unlimited

There is no limit to losses incurred in the trade. The risk is when the price of the underlying falls, and the Put is exercised. You are then obliged to buy the underlying at the strike price.

Unlimited

Maximum loss is unlimited and depends on by how much the price of the underlying falls. Loss happens when price of underlying goes below the purchase price of underlying.

Loss = (Purchase Price of Underlying - Price of Underlying) + Premium Received

Rewards Limited

The profit is limited to premium received in your account when you sell the Put Option.

Limited

You earn premium for selling a call. Maximum profit happens when purchase price of underlying moves above the strike price of Call Option.

Max Profit= [Call Strike Price - Stock Price Paid] + Premium Received

Maximum Profit Scenario

Underlying doesn't go down and options remain exercised.

Underlying rises to the level of the higher strike or above.

Maximum Loss Scenario

Underlying goes down and options remain exercised.

Underlying below the premium received

Pros & Cons or Short Put and Covered Call

  Short Put Covered Call
Advantages

It allows you benefit from time decay. And earn income in a rising or range bound market scenario.

It helps you generate income from your holdings. Also allows you to benefit from 3 movements of your stocks: rise, sidewise and marginal fall.

Disadvantage

It is a high risk strategy and may cause huge losses if the price of the underlying falls steeply.

Unlimited risk for limited reward.

Simillar Strategies

Bull Put Spread, Covered Call, Short Straddle

Bull Call Spread







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