A cash-covered put is a options trading strategy where an investor sells put options while maintaining enough cash in their account to cover the purchase of the underlying asset if the options are exercised.
When a person sells a put option, they are giving someone else the right to sell them an underlying asset at a specified price (strike price) within a specified time frame. In exchange for selling this option, the seller (also known as the writer) receives a premium from the buyer of the option.
With a cash-covered put, the seller has enough cash in their account to cover the cost of buying the underlying asset at the strike price if the buyer of the option decides to exercise their right to sell. This strategy can be used to generate income from the premiums received from selling put options, while also having the ability to potentially acquire the underlying asset at a discounted price.
One should however remember that while cash-covered puts can generate income and potentially provide opportunities for acquiring assets at a discount, they do involve risk. If the price of the underlying asset drops significantly, the seller may end up having to purchase the asset at a higher price than its current market value. Therefore, it’s important for investors to carefully consider their risk tolerance and do their research before engaging in this strategy.