Covered Put -Ch 23

[Nimisha]

Hi
The course notes state that "We cannot really have a covered put (except in the sense of holding cash equal to the exercise price) because u can't be short of the underlying asset".
I am unable to understand why is a covered put not possible and have not understood the above paragraph.

 

[mugono]

Hi
The course notes state that "We cannot really have a covered put (except in the sense of holding cash equal to the exercise price) because u can't be short of the underlying asset".
I am unable to understand why is a covered put not possible and have not understood the above paragraph.

A covered put is a "covered" short put position. In practice, there can be restrictions on an investor’s trading permissions that limits their ability to short the underlying (short put plus short shares is synthetically a short call: a completely different risk profile). In such circumstances, the only ‘other’ way to cover a short put position would be to hold sufficient cash to take delivery of the shares if assigned.