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Finance Glossary

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Covered Put Writer


Writing is another common term for "selling." So writing a put = selling a put.

For every buyer of a put option, there has to be another party that sells that put.


We'll start with a covered call because it is easier to understand... and explain. In a covered call trade, the trader buys shares, believing they will go up (duh) and then also sells a call against them (which gives others the right to buy the shares at a specific price). That is, she buys IBM at $130 a share and then for $4 a share, sells call options with a $150 strike which expire in 4 months. If IBM rockets upwards to $180 in the time period, the trader makes $20 a share from the shares that went from $130 to $150—and also makes $4 from the call option she sold, for a grand total of $24 in gains. But if she had just owned the stock and played golf the whole time, she would have made $50 in just owning the stock, nothing fancy.

In a covered put, things happen in reverse. She buys IBM at $130, thinking it's going down. But she's nervous, so she sells put options to go along with this trade. Here, she might sell puts with a strike price of $110 strike for $4, which expire in 4 months. That is, the buyer of the put has the right to "put," or sell, IBM back to our friendly female trader here at $110 a share. So if IBM tanks and goes to $80 a share, our trader makes $20 a share from the decline from $130 to $110. And then she pockets another $4 from the put she sold. At $80, her IBM shares will be put to her but she will be "covered" because she has the shares that she shorted in the first place. So, the risk is less. But the reward is less, too: If she'd just shorted IBM and played golf, she would have made $50 from IBM's decline from $130 to $80 in that time period.