Important notice
The information on this web site is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current. Trading in stocks and options involves risk. You can lose money. You should always seek professional advice from your stock broker. We are not stockbrokers and do not make recommendations to buy or sell any stock or option. We provide educational information for your evaluation.

Return to Options Strategy

This strategy is neutral to bearish, we need the stock to stay neutral or go down.

In this play we short (Sell) the stock and write a put to insure against potential losses on a short play which involves selling a stock with the expectation it will drop in price.

In this play a Put Writer is considered to be covered if he has the same underlying security (XYZ Stock) shorted. The Put writer has the obligation to buy the SXZ stock, if the XYZ stock is trading below the strike price by option expiration date.

In this play, the profit potential is limited to the premium you receive for writing (selling) the option plus the difference between the price that the stock was shorted at and trading at option expiration.

The high risk involved. If XYZ stock increases significantly and moves above the Short entry the premium you receive normally does not cover the loss of the cost to cover XYZ stock.

Example 1; XYZ stock is trading at 35.00 and we write (sell) the 30.00 strike price for 2.00, and we short XYZ stock at 35.00, XYZ does gap up to 40.00, now we are losing 5.00 on the short side and only have 2.00 from writing the put, 5.00-2.00 = 3.00 a loss of 3.00.

Example 2; we short the XYZ stock at 35.00 and write (sell) the 30.00 put for the 2.00, and the XYZ stock drops to the 31.00 level by expiration date, this would mean the XYZ stock will not be put to us and we keep the 2.00 for writing the put option and because we shorted the stock at 35.00 we can cover

it (Buy it back) for 31.00 and receive 4.00 profit.

  From the shorting we receive 4.00

  For writing the put we receive 2.00

  A TOTAL PROFIT OF 6.00

Example 3; XYZ trades down to 29.00 the stock is put to us at 30.00 we did receive 2.00 premium 30.00 - 2.00 = 28.00 we can turn and sell the stock for 29.00 for a 1.00 profit and put the XYZ we shorted for 35.00 for a 6.00 profit,

A TOTAL PROFIT OF 6.00 + 1.00 = 7.00

The above quotes do not take in to consideration the margin cost and the cost of brokerages fees.