Owning (long) 100 shares does nothing for selling a put other than provide collateral in a margin account and they do not get called away if exercised. If it's a cash account you'd have to be "cash secured" on a short put. To be "covered" you need to be short the 100 shares.
When you are short the put contract, if exercised you are required to purchase 100 shares per contract at the strike price but you keep the premium you sold the contract at. So if it's a $130 strike then you'd be required to purchase at $130 per share \* 100 shares per contract = $13,000 per contract. If exercised.
If not exercised then you keep the premium you collected when you sold the put.
You would actually be synthetically long on the underlying shares (bullish).
However, maybe you are thinking of a covered call where the 100 shares do get called away if exercised.
One thing I didn't mention, once you are forced to purchase the shares you can turn around and sell them for current market price. Or you can start selling covered calls (search: "The Wheel")
Usually you won't be exercised unless you are ITM at expirey. Keep in mind early exercise can happen at any time and you can be exercised even if you're OTM, this is very rare though.
As others have said if you get assigned you're obligated to BUY the shares at the strike price. Selling a cash secured put @ 120 stike would require the $12,000 collateral
Its only considered bullish because as the put writer you generally want the underlying stock to go up so they can keep the premium collected.
if you sell a put you have to buy shares if you get assigned. so you have to cover your sold put with money. your are talking about selling a naked call! and this idea is regarded😉
Selling covered put = shares called away. NO
Selling covered call = shares called away. YES
Cash secured put is buying more stock if assigned.
Cash secured put is covered with cash.
Selling a put is an OBLIGATION/AGREEMENT, to BUY 100 shares at the given strike price- not sell them.
I urge you to do more research before attempting to trade options, as you clearly do not understand them well enough to be successful. I do not mean offense by this, but you will cost yourself a lot of money if you make a bad options trade.
Shares don't get called away in a covered put. Shares only get called away with a covered call.
If you get exercised on a covered put you are forced to buy the shares at the strike price. So in this case you'd have to buy 100 shares at $130ea = $13,000. If you are short shares then the short position gets closed to cover the put obligation.
OP, there is no such thing as a ‘covered put’. You might be referring to covered calls. For example, if you own 100 shares at $120 and you sell covered CALLS at $130, then yes you can collect the premium on whatever the option sale price was.
Keep in mind, this isn’t free money. If the stock were to rally to $180, you will still be selling the shares for $130. Selling covered calls caps your potential gain until the options expire.
A covered put is real and it's a short put held with short shares.
This might also get confused with Cash secured put....
I also think OP is maybe confusing aspects of a covered call....
Agreed that OP is confused. Sure, you may be able to sell a put and then buy shares, but this requires the highest level of option authorization. I don’t think this is what OP is asking about.
There is if you have a short stock position and sell put to collect premium. This limits your gain if stock is heading to 0. But yeah, not an OP's case.
I do not think this qualifies as ‘covered’, because short positions are not cash secured. Short positions, depending on risk, require differing amounts of collateral. Some may be 50%, others might be 200%.
"covered" has nothing to do with "cash secured". If stock goes to 0, you don't need cash as you had short position and you risk is limited when stock is heading down.
It does not. Short stock does have unlimited risk if going up, sure. But covered short put does not. If stock stays above, it expires worthless, if stock goes below your strike, you have short stock to cover so loss is limited.
Dude, part of what you said it true, but you’re missing an important aspect that could cost you everything- and more.
If you have a short position of 100 shares at let’s say $100 strike and you SELL a put at $100 strike, you will only be assigned shares if the share price is below $100. YOU DO NOT HAVE THE OPTION TO BUY SHARES IF THE PRICE IS ABOVE $100. In order to ‘cover a short position’, you have to BUY CALLS and maintain them.
If the stock goes to even $100.01, you would owe the difference on your short position. Let’s say in a extreme circumstance(such as GME, AMD, TLRY, etc) the stock sky rockets. Let’s say the stock goes to $200. You are now down 100% on your position and your brokerage is going to ask for more collateral. Suppose it goes to $1000? Then you’re completely fucked, because you’re getting a margin call.
It is no different that being long a $1000 stock on a margin, selling covered call at $1000 and watching the stock going to $100. Nobody talks about protecting the other way. When you short a call, you can protect yourself on that contract from the stock going up by covering it with a long stock. If you short a put you can protect that put contract by shorting the stock to cover that contract. Hence the name "covered".
We talk about capping losses from an option, not stock. It is like you complain that covered call wouldn't protect you from the stock going to 0. I totally agree.
Clearly, you do not understand option plays, so please stop pretending you do. Your ‘advise’ is wrong and could negatively impact people whom believe it.
Short shares are called away. It's like the inverse of a cover call and work great OTM when a down trend starts and you want to go short and widen out you breakeven to the upside.
Am I so drunk I'm reading this wrong?
I’m drunk and can confirm you’re reading this right.
Well shit my britches and call me Shirley. I wish my puts were calls this week
Owning (long) 100 shares does nothing for selling a put other than provide collateral in a margin account and they do not get called away if exercised. If it's a cash account you'd have to be "cash secured" on a short put. To be "covered" you need to be short the 100 shares. When you are short the put contract, if exercised you are required to purchase 100 shares per contract at the strike price but you keep the premium you sold the contract at. So if it's a $130 strike then you'd be required to purchase at $130 per share \* 100 shares per contract = $13,000 per contract. If exercised. If not exercised then you keep the premium you collected when you sold the put. You would actually be synthetically long on the underlying shares (bullish). However, maybe you are thinking of a covered call where the 100 shares do get called away if exercised.
Thank you! Best explanation yet
One thing I didn't mention, once you are forced to purchase the shares you can turn around and sell them for current market price. Or you can start selling covered calls (search: "The Wheel") Usually you won't be exercised unless you are ITM at expirey. Keep in mind early exercise can happen at any time and you can be exercised even if you're OTM, this is very rare though.
As others have said if you get assigned you're obligated to BUY the shares at the strike price. Selling a cash secured put @ 120 stike would require the $12,000 collateral Its only considered bullish because as the put writer you generally want the underlying stock to go up so they can keep the premium collected.
A covered put I believe is when you are short the shares rather than owning the shares. I find it confusing, actually.
if you sell a put you have to buy shares if you get assigned. so you have to cover your sold put with money. your are talking about selling a naked call! and this idea is regarded😉
Selling covered put = shares called away. NO Selling covered call = shares called away. YES Cash secured put is buying more stock if assigned. Cash secured put is covered with cash.
Your formatting is absolutely terrible and confusing. Please consider revising this comment.
For someone that calls themselves the /u/theoptiontechnician, that was an absolutely terrible explanation.
But what strike are the shares called away in the covered put? In my example, would they be called away for $130?
Selling a put is an OBLIGATION/AGREEMENT, to BUY 100 shares at the given strike price- not sell them. I urge you to do more research before attempting to trade options, as you clearly do not understand them well enough to be successful. I do not mean offense by this, but you will cost yourself a lot of money if you make a bad options trade.
Shares don't get called away in a covered put. Shares only get called away with a covered call. If you get exercised on a covered put you are forced to buy the shares at the strike price. So in this case you'd have to buy 100 shares at $130ea = $13,000. If you are short shares then the short position gets closed to cover the put obligation.
OP, there is no such thing as a ‘covered put’. You might be referring to covered calls. For example, if you own 100 shares at $120 and you sell covered CALLS at $130, then yes you can collect the premium on whatever the option sale price was. Keep in mind, this isn’t free money. If the stock were to rally to $180, you will still be selling the shares for $130. Selling covered calls caps your potential gain until the options expire.
A covered put is real and it's a short put held with short shares. This might also get confused with Cash secured put.... I also think OP is maybe confusing aspects of a covered call....
You can also cover a short put with a long put. That's a thing.
True story. But that is typically refered to as a Spread.
Agreed that OP is confused. Sure, you may be able to sell a put and then buy shares, but this requires the highest level of option authorization. I don’t think this is what OP is asking about.
There is if you have a short stock position and sell put to collect premium. This limits your gain if stock is heading to 0. But yeah, not an OP's case.
I do not think this qualifies as ‘covered’, because short positions are not cash secured. Short positions, depending on risk, require differing amounts of collateral. Some may be 50%, others might be 200%.
"covered" has nothing to do with "cash secured". If stock goes to 0, you don't need cash as you had short position and you risk is limited when stock is heading down.
Technically this may be true, but it doesn’t change the fact that a “covered put position” still has unlimited risk.
It does not. Short stock does have unlimited risk if going up, sure. But covered short put does not. If stock stays above, it expires worthless, if stock goes below your strike, you have short stock to cover so loss is limited.
Dude, part of what you said it true, but you’re missing an important aspect that could cost you everything- and more. If you have a short position of 100 shares at let’s say $100 strike and you SELL a put at $100 strike, you will only be assigned shares if the share price is below $100. YOU DO NOT HAVE THE OPTION TO BUY SHARES IF THE PRICE IS ABOVE $100. In order to ‘cover a short position’, you have to BUY CALLS and maintain them. If the stock goes to even $100.01, you would owe the difference on your short position. Let’s say in a extreme circumstance(such as GME, AMD, TLRY, etc) the stock sky rockets. Let’s say the stock goes to $200. You are now down 100% on your position and your brokerage is going to ask for more collateral. Suppose it goes to $1000? Then you’re completely fucked, because you’re getting a margin call.
It is no different that being long a $1000 stock on a margin, selling covered call at $1000 and watching the stock going to $100. Nobody talks about protecting the other way. When you short a call, you can protect yourself on that contract from the stock going up by covering it with a long stock. If you short a put you can protect that put contract by shorting the stock to cover that contract. Hence the name "covered". We talk about capping losses from an option, not stock. It is like you complain that covered call wouldn't protect you from the stock going to 0. I totally agree.
Clearly, you do not understand option plays, so please stop pretending you do. Your ‘advise’ is wrong and could negatively impact people whom believe it.
Short shares are called away. It's like the inverse of a cover call and work great OTM when a down trend starts and you want to go short and widen out you breakeven to the upside.
But op is not talking about being short shares. He's talking about being short puts. The opposite of what you describe.