Covered Put is a strategy that is devised when an investor is intending to short shares in the underlying and feels that the price of an underlying Stock/ Index is going to remain range bound or move down.
In Covered Put, an investor sells a Put Option on a stock he is short on. This leads to an inflow of premium for the investor. The profit is capped till the underlying remains below the Strike price. If the underlying crosses the Strike price, the Put Option will start making loss and there could be a chance of unlimited loss.
The investor can use this strategy as an income in a neutral market.
Investor view: Neutral to bearish on direction.
Breakeven: Stock price + premium received
In the above chart, the breakeven happens the moment Nifty crosses 5250.
The reward is limited to 12500 [calculated as (Difference in adjacent Sell Call strike price and Underlying Buy price + premium received) * Lot Size]. The risk is unlimited.