I want to talk about naked short put, albeit a synthetic short put. And that is the covered call.
Long the stock, short the call is exactly the same as being short the put. As you can see, the P&L graphs are identical:
?
Your profit is capped by the premium you receive for the call. That premium is also the only protection you have to the downside. If the stock falls farther than the premium you?receive you start losing money. How is this different from selling a put? It isn?t!
Take an imaginary stock, XYZ, trading at 50. If I buy the stock at 50 and sell the 52.50 call at 2 the most I can make is 4.50 if assigned on the call. 2.50 in the stock plus 2 for the call. And I start losing money at 48. The exact same thing holds true if I sell the 52.50 put at 4.50. The most I can make is the 4.50 I get if the put expires worthless, and I start losing money if the stock falls below 48.
In fact, the covered call is even a worse strategy than selling the put because it is two trades rather than one, doubling your commissions.?In fact, I don?t like the covered call strategy at all. It caps your upside potential while offering minimal downside protection. It is not a direction neutral strategy, it is an entirely bullish trade. If you want to be that bullish then just sell ta vertical put spread. You make money if the stock goes higher and your dpwnside risk is well defined.