• Short 100 shares.
• Short an out-of-the-money put. 

<Risk chart of covered put retrieved from OptionsPlay>

For stocks, a covered put is short a put and also short 100 shares. This is one of the most underrated strategies in options trading. It is capable of seizing many advantages while also reducing total risk (depending on the configuration), and it can easily be converted into a neutral or bullish strategy by adjusting how many shares are shorted. 

In general, a covered put involves shorting the underlying security and also shorting a put. By shorting the put, this delta-hedges against the short put. 

If a trader has a directional thesis, then a covered put (short a full 100 shares) makes sense if there is also the more specific thesis that the underlying security will drop alongside a decrease in its IV. 

As an example, opening a covered put could be a logical strategy if a Put Wall is breached because at that point IV (implied volatility) should already be quite high.

Advanced: Dynamics

A covered put can capitalize on a market that is slowly bleeding down. It does not need to be a bearish strategy because the trader can short exactly as many shares as the deltas in the short put, therefore making it a delta-neutral trade. When this is the case, it is a pure short on implied volatility, but one that has very little directional risk. 

This is a highly dynamic strategy and should be done in simulation until understanding is confirmed. However, this can be an excellent strategy for environments where both the spot price and IV are bleeding at the same time. It can also hit max profit even if slightly wrong about direction.

delta: A first-order Greek that measures the sensitivity of an option's price to directional movement in the underlying security. Factoring out nonlinear dynamics, the instantaneous value of one delta is worth one share of a stock. This means that if the option on a stock is 40 delta, such as a 40 delta long call or a 40 delta short put, then instantaneously it has the same profit/loss dynamics of being long 40 shares. 

hedge: To hedge is to set up precautionary or defensive measures which partially compensate against heavy losses or limit further losses. A well-designed hedge is asymmetrical to the larger position it is protecting—in a way that it suddenly increases in size if the larger position takes on losses. A hedge does not aim at being perfect and would generally be content near a limit of recovering a portion of the losses from what it is protecting.

IV (implied volatility): The expected percentage range over a year with 68.3% confidence. This is based on options pricing at one standard deviation. Long options benefit from increases in implied volatility and short options benefit from decreases in implied volatility. In general, when implied volatility increases it means that the expected percentage range is getting larger. When implied volatility is applied to lengths of time other than one year, then this is called the expected move.

Put Wall: The Put Wall is our major support level, which measures the most amount of negative gamma in the market. This shows us what the bottom of the probable trading range is (the lower bound). 

security: Any investment product that can be traded on an exchange, such as but not limited to stocks, futures, ETFs, options, bonds, mutual funds, and treasuries. 

short put: To be short (sell to open and hold) a put. Unless otherwise hedged, the owner of the short put has severe risk and only limited potential gains, which makes this an extremely dangerous strategy in isolation. If left to expire, a short put will achieve max profit if the price ends up above the strike price. Shorting a put is a way to express a thesis that one is “not bearish” such as what might be justifiably the case if testing a Put Wall from above; being “not bearish” is different than being bullish. For a short put to be profitable, the underlying security must underperform the premium placed on that put by the options market. In other words, a short put profits when the underlying security fails to beat the options market. To be closed early for a profit, there needs to be a decrease in implied volatility or the underlying must have fallen less than the options market has priced in for that specific period of time. All short puts have short gamma and short vega but long theta. Short options also come with obligations instead of rights, which means that, at any time, shares can be assigned (100 short shares for each contract); assignment usually only happens when in-the-money and near expiration). Synthetically, a short put becomes logically equivalent to a short call if the trader is also short 100 shares.

spot price: The immediate delivery price of an underlying security. Shares are always considered the spot price, while options are a derivative of that. We also referred to index prices as spot—in contrast to futures or options on them.

underlying: A reference to the immediate price of the underlying security. This is also sometimes called spot (the spot price of the underlying). The spot price is in contrast to derivatives which have option prices or [forward] futures prices.