10. Uncovered Puts to Create Cash Flow: Rising Markets and Reversal Patterns

A final range of strategies worth exploring is that of the short put. In chapters on spreads and straddles, short puts were shown as being covered by longer-term long puts, or even offset by short stock as a form of cover. Traders acknowledge that uncovered calls are high risk because it is impossible to know how high a stock’s price can rise. The corresponding risk for uncovered puts is far lower, for four reasons:

1. Stock prices cannot fall indefinitely. Although uncovered call risk is in theory unlimited, uncovered put risk is less simply because there is a limit to how far a stock’s price can fall. It could fall to zero if a company could be shown to be worthless. ...

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