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Covered Put (Married Put) Option Trading Strategy Explained

Published on Thursday, April 19, 2018 | Modified on Wednesday, June 5, 2019

The Covered Put is a neutral to bearish market view and expects the price of the underlying to remain range bound or go down. In this strategy, while shorting shares (or futures), you also sell a Put Option (ATM or slight OTM) to cover for any unexpected rise in the price of the shares.

This strategy is also known as Married Put strategy or writing covered put strategy.

The risk is unlimited while the reward is limited in this strategy.

How to use a Protective Call trading strategy?

The usual Covered Put looks like as below for State Bank of India (SBI) Shares which are currently traded at Rs 275 (SBI Spot Price):

Suppose SBI is trading at Rs 275. You believe that the price will remain range bound or mildly drop. The covered put allows you to benefit from this market view. In this strategy, you sell the underlying and also sell a Put Option of the underlying and receive the premium. You will benefit from the drop in prices of SBI and at the same time, the Put Option will minimize your risks. If there is no change in price then you keep the premium received as profit.

The Covered Put looks like as below for NIFTY which is currently traded at 10400 (NIFTY Spot Price):

Suppose NIFTY shares are trading at 10400. If we are expecting the price of NIFTY to go down a little or remain range bound in near future, we sell 1 lot of NIFTY future. Now to protect ourselves against the rise in the price, we sell an ATM PUT Option of NIFTY. Any upward movement in the NIFTY will result in unlimited risk in this strategy.

When to use Covered Put (Married Put) strategy?

The Covered Put works well when the market is moderately Bearish

Example

Example 1 - Stock Options:

Let's take a simple example of a stock trading at Rs 45 (spot price) in June. The option contracts for this stock are available at the premium of:

• July 45 Put - Rs 2

Lot size: 100 shares in 1 lot

1. Sell 100 Shares: 100*45 = Rs 4500 Received
2. Sell July 45 Put: 100*2 = Rs 200 Received

Now let's discuss the possible scenarios:

Scenario 1: Stock price remains unchanged at Rs 45

• Sell 100 Shares: 100*45 = Rs 4500 (no profit or loss)
• Sell July 45 Put: Expires worthless
• Net Credit was Rs 4700 initially received to take the position.
• Total Loss: 4700 - 4500 = Rs 200.

The total profit of Rs 200 is also the maximum profit in this strategy. This is the amount you received as premium at the time you enter in the trade.

Scenario 2: Stock price goes to Rs 55

• Sell 100 Shares: (45*100) - (55*100) = -Rs 1000
• Sell July 45 Put: Expires worthless
• Total Loss = - 1000 + 200 (Premium Received) = Rs 800

In this scenario, Rs 1000 is the loss made from shares shorted. The net loss made in this transaction is Rs 800.

Scenario 3: Stock price goes down to Rs 40

• Sell 100 Shares: (45*100) - (40*100) = Rs 500
• Sell July 45 Put: Expires in-the-money (40-45)*100= -Rs 500
• Total Profit = 500 - 500 + 200 (Premium Received) = Rs 200

In this scenario, Rs 500 is the profit earn from shares shorted. At the same time, we lost Rs 500 in July 45 Put. The net profit earned is Rs 200 premium received at the beginning.

Example 2 - Bank Nifty

Market View - Bearish

When you are expecting a moderate drop in the price and volatility of the underlying.

Actions

Sell Underlying Sell OTM Put Option

Suppose SBI is trading at 300. You believe that the price will remain range bound or mildly drop. The covered put allows you to benefit from this market view. In this strategy, you sell the underlying and also sell a Put Option of the underlying and receive the premium. You will benefit from drop in prices of SBI, the Put Option will minimize your risks. If there is no change in price then you keep the premium received as profit.

Breakeven Point

Futures Price + Premium Received

The break-even point is achieved when the price of the underlying is equal to the total of the sale price of underlying and premium received.

How to exit?

• Wait for the Option to expire and retain premium.
• Buy back the underlying and the Options sold.

Simillar Strategies

Bear Put Spread, Bear Call Spread

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