If the trader is bearish on market and bullish in volatility, he will implement this strategy. However the trader can be neutral in nature i.e. indifferent if the market moves in either of the direction, this strategy will make profits, but uptrend will give a capped income than downtrend which will give unlimited returns.
This strategy is exactly opposite to Covered Call Strategy. Here the investor is neutral or moderately bearish in nature and wants to take advantage of the price fall in the near future. The trader will short one lot of stock future. Now the trader will short ATM Put Option, the option strike price will be his exit price. If the prices rally above the strike price, the ..
PUT BACKSPREAD Vs COVERED PUT - When & How to use ?
PUT BACKSPREAD
COVERED PUT
Market View
Bearish
Bearish
When to use?
The Covered Put works well when the market is moderately Bearish.
Action
Sell Underlying Sell OTM Put Option
Breakeven Point
Futures Price + Premium Received
PUT BACKSPREAD Vs COVERED PUT - Risk & Reward
PUT BACKSPREAD
COVERED PUT
Maximum Profit Scenario
The profit happens when the price of the underlying moves above strike price of Short Put.
Maximum Loss Scenario
Price of Underlying - Sale Price of Underlying - Premium Received
Risk
Limited
Unlimited
Reward
Unlimited
Limited
PUT BACKSPREAD Vs COVERED PUT - Strategy Pros & Cons
PUT BACKSPREAD
COVERED PUT
Similar Strategies
Bear Put Spread, Bear Call Spread
Disadvantage
• Limited profit, unlimited risk. • Trader should have enough experience before using this strategy.
Advantages
• Investors can book profit when underlying stock price drop, move sideways or rises by a small amount. • Able to generate monthly income. • Able to generate profit from fall in prices or mild increase in the prices.
