Alert

Looking to access our full catalog of shows? Log in to see what's recent and get old favorites!

Poor Man Covered Put

A “Poor Man’s Covered Put” is a Put Diagonal Debit Spread that is used to replicate a Covered Put position. The strategy gets its name from the reduced risk and capital requirement relative to a standard covered put. The strategy is also much safer than a covered put because there is no naked short stock component.

Directional Assumption: Bearish

Setup:
- Buy an in-the-money (ITM) put option in a longer-term expiration cycle
- Sell an out-of-the-money (OTM) put option in a near-term expiration cycle

The trade will be entered for a debit. It’s important that the debit paid is no more than 75% of the width of the strikes.

Example:
Stock at $100
Purchase (Expiration 2) 110 put for $15
Sell (Expiration 1) 90 put for $5
Net debit = $10.00 on a 20-point-wide long put diagonal spread

Ideal Implied Volatility Environment: Low

Max Profit: The exact maximum profit potential cannot be calculated due to the differing expiration cycles used. However, the profit potential can be estimated with the following formula:

Width of put strikes - net debit paid

How to Calculate Breakeven(s): The exact break-even cannot be calculated due to the differing expiration cycles used in the trade. As a rough estimate, the break-even area can be approximated with the following formula:

Long put strike price - net debit paid

tastytrade approach:

A Poor Man’s Covered Put (PMCP) is a great alternative to trading a covered put. This is because a covered put position incorporates shorting stock, which is a strategy with undefined risk. Trading a PMCP is a way to define the risk of the trade and use less capital.

The setup of a poor man’s covered put is very important. If we have a bad setup, we can actually set ourselves up to lose money if the trade moves in our direction too fast. To ensure we have a good setup, we check the extrinsic value of our longer dated ITM option. Once we figure that value, we ensure that the near term option we sell is equal to or greater than that amount. The deeper ITM our long option is, the easier this setup is to obtain. We also ensure that the total debit paid is not more than 75% of the width of the strikes.

We never route poor man’s covered put spreads in volatility instruments. Each expiration acts as its own underlying, so our max loss is not defined.

tastytips:

When do we close PMCPs?
In the best case scenario, a PMCP will be closed for a winner if the stock prices decreases significantly in one expiration cycle. This is because the put options will trade closer to intrinsic value and the profit potential for the trade will diminish.

When do we manage PMCPs?
For losing trades due to the stock price increasing, the short put can be rolled to a higher strike to collect more credit.

Market Data provided by CME Group & powered by dxFeed Technology. Options involve risk and are not suitable for all investors.
Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”). tastytrade is a trademark/servicemark owned by tastytrade.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. tastytrade is an investor in Small Exchange, Inc.

© copyright 2013 – 2021 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on tastytrade.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.