A covered put would be considered by someone who would like to derive additional income from a short stock position. A covered put allows the investor to hold a short equity position while simultaneously receiving the premium from selling an equal amount of put options against it. The covered put writer is bearish on the stock’s long-term potential but is willing to forego a stock’s downside below the strike during the life of the option in order to receive the proceeds of the put premium. It should be noted that the combined position has a similar profile to that of a short call. The covered put writer remains exposed to any upside in the underlying shares, meaning his loss potential is unlimited.
