A Covered Put strategy is the complete opposite of a Covered call approach. Covered Call is all about being neutral to bullish, while Covered Put is more about being neutral to bearish. So, as an investor, you turn to the Covered Put approach when you believe that a stock or index’s price will either remain within a tight range or decline. If you are new to the covered puts concept, then this article can help. Here, we will explore in detail about covered puts strategy in options trading in India. We will also understand when to apply the covered puts strategy and its importance.
What Are Covered Puts?
The Covered Put strategy is the opposite of a Covered Call strategy. In a Covered Call, you’re pretty neutral or optimistic about a stock or index, while in a Covered Put, you’re more on the neutral to pessimistic side. You use this strategy when you think a stock or index will either stay in a certain price range or go down.
You basically make a bet that a stock or index will go down. You do this by borrowing and selling the stock and also selling a Put option on that stock or index. If things go as you expect, and the stock or index does drop in price, you can profit from this strategy in options trading in India.
When Traders Use Covered Puts?
The Covered Put strategy is a smart move for traders who are feeling pretty neutral or a bit negative about a particular investment. They believe the price might dip a bit, and they want to profit from that dip. However, they should stay far away from this strategy if they expect the price to rise because it can lead to massive losses.
With the Covered Put, it’s like setting up a safety net to make money if the price goes down. Additionally, it will move the breakeven point higher and give a larger margin for error. This means that before the trader incurs losses, the stock price needs to move higher than the amount of Premium received.
The money they receive from selling that Put option should help cover some potential losses or increase their profits by the same amount. But the amount they can make with this strategy has a limit. If they didn’t use the Covered Put, they could keep making money as long as the price kept dropping.
Due to the presence of the Put in the covered put strategy. If the stock price falls below the strike price of the put option, the put option will expire and must be brought back. As a result, the gains from shorting the stock are balanced out by the losses in buying back the Put, and the profits are capped.
Importance Of Covered Puts
Using a Covered Put strategy is like a safety net for an investor who thinks a company’s stock is going to do poorly. They’re essentially betting on the stock going down, and they write a put option to help offset the cost of this negative outlook.
When investors short a stock, they’re hoping its price will drop. The problem is if the stock price goes up, they can lose money. That’s where the Covered Put strategy comes in handy. By writing a put option, they get an extra payment that acts like a cushion if the stock price rises. If, when the option expires, the stock price is higher than the put’s strike price, the option becomes worthless.
In this case, the put writing option premium can help reduce losses. Alternatively, the option will be in the money if the stock price is below the strike price. If the stock price falls, the investor will profit from the covered put method.
Additionally, investors can easily implement the Covered Put strategy through the online trading app, making it accessible and convenient for them to manage their positions and options.
Conclusion
When the market outlook is neutral to bearish, covered puts can be an excellent tool for traders to manage their positions. When used properly, this strategy can mitigate potential losses and cap profits. Understanding the dynamics of Covered Puts is a valuable step for those starting their journey in options trading in India. The implementation of these strategies is best achieved with the assistance of a reputable financial service provider like Share India. Their platforms are easy to use, and they provide guidance for executing trades efficiently.
