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Covered Put (Married Put) Options Trading Strategy Explained

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

Covered Put (Married Put)

Covered Put (Married Put) Options Strategy

Strategy LevelAdvance
Instruments TradedPut + Underlying
Number of Positions2
Market ViewBearish
Risk ProfileUnlimited
Reward ProfileLimited
Breakeven PointFutures Price + Premium Received

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 ₹275 (SBI Spot Price):

Covered Put Orders - SBI Stock
OrdersSBI Strike Price
Sell Underlying SharesSell 100 SBI Shares at ₹275
Sell 1 ATM PUT OptionSBI18APR275PE

Suppose SBI is trading at ₹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):

Covered Put Orders - NIFTY
OrdersNIFTY Strike Price
Sell NIFTY FuturesSell 1 lot of NIFTY Future at ₹10400
Sell 1 Slight OTM Call PutNIFTY18APR10300PE

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 ₹45 (spot price) in June. The option contracts for this stock are available at the premium of:

  • July 45 Put - ₹2

Lot size: 100 shares in 1 lot

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

Now let's discuss the possible scenarios:

Scenario 1: Stock price remains unchanged at ₹45

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

The total profit of ₹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 ₹55

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

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

Scenario 3: Stock price goes down to ₹40

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

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

Example 2 - Bank Nifty

Covered Put Example Bank Nifty
Bank Nifty Spot Price8900
Bank Nifty Lot Size25
Covered Put Options Strategy
Strike Price(₹)Premium(₹)Total Premium Paid(₹)
(Premium * lot size 25)
Sell 1 Future Lot8900--
Sell 1 Slight OTM Call Option88002005000
Net Premium2005000
Breakeven(₹)Future Price + Put Premium Received
(8900 + 200)
9100
Maximum Possible Loss (₹)Unlimited-
Maximum Possible Profit (₹)Future Price - Strike Price + Put Premium Received7500
(8900-8800+200)*25
On Expiry Bank NIFTY closes atPayoff on Future Sold (₹) @8900Payoff from 1 Put Sold (₹) @8800Net Payoff (₹)
850010000
(8900-8500)*25
-2500
(5000-((8800-8500)*25))
7500
87005000
(8900-8700)*25
2500
(5000-((8800-8700)*25))
7500
89000
(8900-8900)*25
50005000
9100-5000
(8900-9100)*25
50000
9300-5000
(8900-9100)*25
5000-5000
9500-5000
(8900-9100)*25
5000-10000
covered put options strategy 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.

Risk Profile of Covered Put (Married Put)

Unlimited

The Maximum Loss is Unlimited as the price of the underlying can theoretically go up to any extent.

Loss = Price of Underlying - Sale Price of Underlying - Premium Received

Reward Profile of Covered Put (Married Put)

Limited

The maximum profit is limited to the premiums received. The profit happens when the price of the underlying moves above strike price of Short Put.

Max Profit Scenario of Covered Put (Married Put)

Underlying goes down and Options exercised

Max Loss Scenario of Covered Put (Married Put)

Underlying goes up and Options exercised

Advantage of Covered Put (Married Put)

Its an income generation strategy in a neutral or Bearish market. Also allows you to benefit from fall in prices, range bound movements or mild increase.

Disadvantage of Covered Put (Married Put)

The risks can be huge if the prices increases steeply.

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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