What is a covered put?

A covered put is an options trading strategy where an investor sells a put option while simultaneously being short in the underlying stock. This strategy is considered "covered" because the investor has enough shares of the stock to cover the potential obligation of buying the stock at the strike price if the option is exercised.

The goal of a covered put is to generate income from the premiums earned by selling the put option, with the hope that the stock price will either remain unchanged or increase. If the stock price decreases and the put option is exercised, the investor would be obligated to buy the stock at the strike price, but this risk is mitigated by already owning the stock.

Some advantages of a covered put strategy include the ability to generate income from the premiums without requiring a large amount of capital, and the protection provided by already owning the underlying stock. However, there are risks involved, such as potential losses if the stock price drops significantly below the strike price.

Overall, a covered put can be a useful strategy for investors who are neutral or slightly bearish on a stock and are looking to generate income while also managing risk. It is important for investors to thoroughly understand the risks and potential outcomes before using this strategy.