Covered Put - Meaning, Use, Importance and Benefits

If you’re expecting a stock’s price to drop or simply stay flat, the Covered Put is a smart strategy to help you earn extra income from that prediction. While most investors only make money when prices go up, this approach allows you to profit when the market is bearish or moving sideways. By combining a short-selling position with a put option you receive an upfront cash payment called a premium. This premium acts as a small safety buffer and boosts your overall returns.

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What is a Covered Put?

A Covered Put is a two-part trade where you:

1. Short the Stock: You borrow shares and sell them, hoping to buy them back later at a lower price.
2. Sell a Put Option: You sell someone else the right to sell you those shares at a specific price (the Strike Price).

It is called Covered because your short-sold shares cover your obligation to buy the shares back. If the put buyer forces you to buy the stock, you just use those shares to close your short position.

The Importance and Benefits of Covered Puts

Benefit

Why it matters

Instant Income

You get paid a Premium (cash) the moment you sell the put. This is your rent for holding the short position.

Safety Cushion

The premium you collect acts as a buffer. If the stock price rises a little bit (which is bad for a short seller), the premium helps cover that loss.

Profit in Flat Markets

Normally, short sellers only make money if the stock falls. With a Covered Put, you make money even if the stock stays exactly where it is.

Target Exit

It allows you to set a Target Price to buy back your shorted shares while getting paid to wait for that price to hit.

How it Works: Example

Imagine ABC Ltd is trading at ₹1,000, and you think it will fall.

1. Step 1: You short-sell 100 shares of ABC Ltd at ₹1,000. (You now owe 100 shares).
2. Step 2: You sell a ₹950 Put Option and receive a ₹30 premium.

The Three Scenarios:

• Scenario A: Stock falls to ₹900. The put buyer forces you to buy the stock at ₹950. You use those shares to close your ₹1,000 short. You make ₹50 profit on the stock + ₹30 from the premium = ₹80 total profit.
• Scenario B: Stock stays at ₹1,000. The put expires worthless. You keep the ₹30 premium as pure profit, and you still have your short position.
• Scenario C: Stock rises to ₹1,050. You lose ₹50 on the stock, but your ₹30 premium covers part of it. Your net loss is only ₹20.

The Risks: What to Watch Out For

While the premium helps, this is still a high-risk strategy:

1. Unlimited Risk: If the stock price moons (doubles or triples), your losses on the short-sold shares could be huge. The small premium won't save you from a massive rally.
2. Capped Profit: Even if the stock crashes to zero, your profit is stopped at the Strike Price. You don't get the extra gain below that level because the put buyer will exercise their right.
3. Margin Requirements: In 2026, brokers (like Motilal Oswal) require a lot of Margin money to let you short-sell stocks and sell puts.

Conclusion

The Covered Put is a professional tool for 2026 investors who are moderately bearish. It is great for times when you think a stock is expensive and will likely drift downwards or stay sideways. It provides immediate cash and a small insurance buffer. However, because short selling has unlimited risk, you must be very careful, and use Stop Losses to make sure a sudden market rally doesn't wipe out your account.