Short Put Vs Covered Strangle Options Trading Strategy Comparison

Short Put works well when you're Bullish that the price of the underlying will not fall beyond a certain level.

A covered strangle strategy can be used when you are bullish on the market but also want to cover any downside risk. You are prepared to sell the shares on profit but are also willing to buy more shares in case the prices fall.

When you are expecting the price or volatility of the underlying to increase marginally.

The Strategy is perfect to apply when you're bullish on the market and expecting less volatility in the market.

• Sell Put Option

A short put strategy involves selling a Put Option only. So if you see that the shares of a Company A will not move below a 1000 then you sell the Put Option of that stock at 1000 and receive the premium amount. The premium received will be the maximum profit you can earn from this deal. However, if the price of the underlying moves below 1000 than you will incur losses.

The covered strangle options strategy can be executed by buying 100 shares of a stock while simultaneously selling an OTM Put and Call of the same the stock and similar expiration date.

There are 2 break-even points in the covered strangle strategy. One is the Upper break even point which is the sum of strike price of the Call option and premium received while the other is the lower break-even point which is the difference strike price of short Put and premium received.

There is no limit to losses incurred in the trade. The risk is when the price of the underlying falls, and the Put is exercised. You are then obliged to buy the underlying at the strike price.

The risk on this strategy is only on the downside when the price moves below the strike price of the Put option.

The profit is limited to premium received in your account when you sell the Put Option.

The maximum profit on this strategy happens when the stock price is above the call price on expiry. The profit is the total of the gain from buying/selling stocks and net premium received on selling options.

Underlying doesn't go down and options remain exercised.

You will earn the maximum profit when the price of the stock is above the Call option strike price on expiry. You will be assigned on the Call option, would be able to sell holding shares on profit while retaining the premiums received while selling the options.

Underlying goes down and options remain exercised.

The maximum loss would be when the stock price falls drastically and turns worthless. The premiums received while selling the options will compensate for some of the loss.

It allows you benefit from time decay. And earn income in a rising or range bound market scenario.

• As the strategy involves buying shares when prices fall, there is long-term gain even if their short-term loss.
• There is no upside risk due to the long position in stocks.
• Allows you to earn income in a moderately bullish market.

It is a high risk strategy and may cause huge losses if the price of the underlying falls steeply.

• The substantial risk when the price moves downwards.
• Risk of assignments.

Bull Put Spread, Covered Call, Short Straddle