Covered Put

A covered put is an options strategy in which the seller simultaneously holds a short position in the underlying asset and sells a put option on the same underlying — collecting the put premium as income while the short position provides the 'cover' for the potential obligation to buy the underlying if the put is exercised. The strategy is the mirror image of the covered call (which combines a long stock position with a short call). In a covered put: if the underlying price falls below the put strike and the put is exercised, the obligation to buy shares at the strike price partially offsets the profit from the short stock position. The premium collected reduces the effective short entry price. The maximum profit is capped when the underlying falls to zero, while the maximum loss is theoretically unlimited if the underlying rises sharply (from the short stock position), partially offset by the premium received. In Indian F&O markets, covered put strategies are used by traders with a bearish outlook who have already established short positions in futures or have borrowed and sold shares through the SLBS (Securities Lending and Borrowing Scheme) — selling put options against these short positions to generate additional premium income and reduce the net cost of the bearish trade while the market gradually declines toward the expected target level.