Covered Put:

Plan ahead and prepare to buy stock at lower price with peace of mind! Phillip clients can deposit 100% proceed for stock assignment (strike price x lot size x contract size) for settlement of stock put option. In addition, there is no commission for opening these short positions!

Example:

Assume Investor A would like to buy #700 at a price slightly below current market level around $310. Investor A can choose “Covered Put”.

Firstly, Investor A can prepare to buy stock at lower price. Using the closing price on 7th January, Investor A shorts $300 Jan put and receives the premium of $4.70 per share or $470 for one contract. If the option is being exercised (i.e. Investor A obliged to buy stock at $300), Investor A effectively bought the stock at $295.30.

Secondly, if Investor A deposits 100% proceed for stock assignment ($300 x 100 = $30,000) as the margin, investor A can enjoy free commission of opening position for short put.

Furthermore, deducting the premium received of $470, actual deposit required is $29,530 (=$30,000 - $470)

Annual Return Rate=

25.3%

Reminder:

The stock price of #700 on 7th January was $317.4, and the price of $300 Jan put was $4.7.

(1) Premium=Option price x lot size = $4.70 x 100 = $470。

(2) If the stock price drops below $300 before or on the expiry date, the cost for buying #700 is equivalent to ($300-$4.7) = $295.3 after deducting the premium. The contract will be automatically expired if the contract hasn’t been exercised and the investor can earn the premium.

(3) Annual Return Rate

=(Option price/(Strike price-Premium)) x (No. of days in a year/no. of days to expiry date) = (4.7/295.3) x(365/23) = 25.3%

(4) Other transaction costs are not included in the above example.

Advantages:

1. No Margin Call

Since clients have already deposited the whole amount of deposit as the margin for settlement, so they avoid any margin calls.

2. Free commission of opening position

Clients can deposit the whole amount of deposit (strike price x lot size x contract size) as the margin for settlement if the option is exercised to enjoy free commission of opening position for short put.

3. Purchase stocks at the lower cost

Clients can choose the strike price as the purchase price, and the premium received from short put can reduce the cost of purchase.

FAQ of Covered Put

1. If clients would like to short 7 lots of put, in which 2 are covered put, how to execute the order?

Clients must execute the order twice, one is for shorting 5 lots of put, and another is for shorting 2 lots of put which is covered put.

2. If clients have the position of several short put contracts with the same strike price, a part of them is covered put, how to close the position?

Covered put contacts are the first contracts to be closed. If clients would like to close the regular short put, it must close all the positions of covered put for the same short put contracts. Example:
Assume investor has 5 lots of #700 Jun $335 short put, in which 3 lots of contracts are covered put contracts.
If investor would like to close the position, he/she must close all the position of covered put before closing those “uncovered put.

3. If clients have the position of several short put contracts with the same strike price, a part of them is covered put, what happens when the contracts are being assigned?

Covered put contracts must be the first contracts to be assigned.
Example:
Assume investor has 6 lots of #700 Jun $335 short put, in which 3 lots of contracts are covered put contracts.
If 4 of them are being assigned, 3 lots of covered put contracts and 1 lot of uncovered short put contracts will be assigned.
If 2 of them are being assigned, 3 lots of covered put contracts will be assigned, while no uncovered short put contracts will be assigned.

FAQ of Covered Put

1. If clients would like to short 7 lots of put, in which 2 are covered put, how to execute the order?

2. If clients have the position of several short put contracts with the same strike price, a part of them is covered put, how to close the position?

3. If clients have the position of several short put contracts with the same strike price, a part of them is covered put, what happens when the contracts are being assigned?

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FAQ of Covered Put

1. If clients would like to short 7 lots of put, in which 2 are covered put, how to execute the order?

2. If clients have the position of several short put contracts with the same strike price, a part of them is covered put, how to close the position?

3. If clients have the position of several short put contracts with the same strike price, a part of them is covered put, what happens when the contracts are being assigned?

Contact Us

E-Check

Investor Notes