What is a Covered Put?

Question

Accepted Answer

A trader who is short 100 shares of stock may sell (or write) a Covered Put. The trader receives a credit for selling the Put, and is obligated to buy those 100 shares at the strike price of the Put.

There are a few common applications of the Covered Put: 1. Reduce the cost basis of shares 2. Generate a yield from short shares 3. Systematic profit-taking.