The Poor Man's Covered Put: A Smarter Way to Profit from Falling Markets

A few years ago, something happened that confirmed how I think about hedging strategies. A reader, clearly someone who knew their way around a spreadsheet, posted a comment (and sent an email) about the entire landscape of portfolio protection methods.

They'd taken an article I'd written about poor man's covered puts and done what most of us never bother to do: they actually tested it across different market environments, comparing it to traditional hedging approaches like protective puts and collars. What they found was fascinating.

"Here's something interesting," they wrote. "I tested this alternative hedging approach on IWM last year, you know, small caps that went sideways most of the time, and it actually made 17% over 333 days. Same setup: 500-day LEAPS put at 80 delta, selling 40-day puts at 30 delta. A hedging strategy that actually generates income while protecting your portfolio? That's pretty remarkable."

The email continued, and this is where it got really interesting: "I'm not putting this trade on during normal times, I'd stick with covered calls or protective puts. But right now? With markets at these levels and everyone acting like gravity doesn't exist anymore? This is exactly the kind of hedge I want. Something that pays me while I wait for sanity to return."

That insight stuck with me. The majority of popular hedging strategies cost you money upfront, you pay for protection and hope you never need it, like insurance. And most don’t diversify hedging strategies using a mix of collars, covered strangles, protective puts and others. But here was an approach that could generate income while providing portfolio protection, essentially getting paid, repeatedly, to hedge rather than paying for the privilege.

Fast forward to today, and those market conditions he mentioned feel remarkably familiar. Markets hovering near record highs, IV ranks near their lows, RSIs in an extended overbought state, valuations that would make your grandfather laugh, and that peculiar mix of euphoria and unease that seems to mark every major turning point.

Picture this: Your portfolio is loaded with growth stocks, tech darlings, and momentum plays. You're sitting on decent gains, but that same nagging voice whispers that the market feels frothy. You want to hedge your portfolio against a potential downturn, but traditional hedging strategies are capital-intensive and clunky. Shorting the S&P 500 through SPY would require nearly $62,500 in capital, money that's already working hard in your existing positions. Even worse, shorting stock exposes you to theoretically unlimited losses if the market continues its relentless climb.

As options traders, strategists, and informed investors, we know there are better alternatives. As I mentioned before, collars, covered strangles, protective puts and others offer far better choices for hedging. So, there's a better way. Now, enter another alternative, the poor man's covered put, a sophisticated yet accessible strategy that lets you profit from falling stock prices while using dramatically less capital and limiting your risk.

Why Most Bearish Strategies Miss the Mark

Most investors approach bearish positions like a blunt instrument. They either short stock, tying up enormous capital with unlimited risk, or simply buy puts, which decay relentlessly as time passes. Both approaches have serious flaws that can drain your account faster than a leaky bucket.

The poor man's covered put solves these problems elegantly. Think of it as getting all the benefits of a traditional covered call strategy, the ability to generate income while betting against a stock, but for 65% to 85% less capital…for a hedge.

The Mechanics: Building Your Bearish Foundation

Here's how the strategy works in practice. Instead of shorting expensive shares, you create a synthetic short position using two carefully selected put options:

Step 1: Buy Your Stock Replacement You purchase a long-term put option, specifically a LEAPS (Long-term Equity Anticipation Securities) contract with at least one year until expiration. This serves as your "stock replacement," giving you the right to sell shares at a predetermined price. The key is choosing an in-the-money put with a delta around 0.80, meaning it moves roughly 80 cents for every dollar the stock drops.

Step 2: Generate Income Against this LEAPS position, you sell shorter-term puts with deltas between 0.20 and 0.40. This generates immediate income while you wait for your bearish thesis to play out. Your goal is to create an overall position delta of approximately 0.50, giving you meaningful exposure to downside moves while collecting premium.

A Real-World Example: Betting Against the Market

Let's examine a concrete example using SPY, the SPDR S&P 500 ETF, the ultimate portfolio hedge. When your entire portfolio is tilted toward growth stocks or specific sectors, SPY represents the broad market benchmark that can provide the perfect counterbalance. With SPY trading around $625, this becomes an ideal hedge against overall market downturns.

Here's why SPY makes such a compelling hedge candidate: It's the most liquid ETF in the world, tracks the benchmark that most portfolios are measured against, and offers tight bid-ask spreads that keep your transaction costs minimal. When markets turn ugly, SPY typically leads the way down, making it the perfect vehicle for portfolio protection.

Traditional covered put approach: You'd need to short 100 shares of SPY, requiring roughly $62,500 in capital. For most investors, that's either impossible or ties up far too much capital in a single hedge position.

Poor man's covered put approach: Instead, you buy a LEAPS put option. Looking at the December January 2027 expiration cycle (547 DTE), you'll find the $700 put strike trading with a delta near 0.80. This option costs approximately $77.75, or $7,775 for one contract, just 12.4% of the traditional approach.

Now for the income generation. You sell a shorter-term put against your LEAPS position. Looking at options expiring in about 43 days, you might sell the $598 put with a delta of 0.20 for roughly $4.56, or $456 per contract.

The numbers tell the story:

• Total investment: $7,319 ($7,775 - $456)

• Capital savings vs. traditional hedge: 88%

• Income generated: 5.9% over 43 days

• Annualized premium return: Approximately 50.1%

The Sweet Spot: Security Selection

Not every stock makes a suitable candidate for this strategy. You need three key ingredients:

Liquidity: Stick to heavily traded stocks and ETFs. You want tight bid-ask spreads and plenty of open interest in the options chain. This isn't the place for obscure small-cap names.

Technical Setup: The best candidates show clear signs of potential weakness, or mean-reversion: low IV rank, low IV percentile, high RSI reading over various timeframes, breadth levels at strong areas of resistance, failed breakouts, or deteriorating fundamentals. Your bearish thesis should be more than just a hunch.

Managing the Position: The Art of Timing

The beauty of this strategy lies in its flexibility. You can continue selling puts against your LEAPS position month after month, collecting premium and reducing your cost basis. Each successful cycle brings you closer to profitability, even if the stock doesn't immediately cooperate with your bearish outlook.

When the short puts expire worthless, which happens roughly 70 to 80% of the time when you sell options with 0.20 to 0.30 deltas, you simply pocket the premium and sell new puts for the next cycle. This creates a steady income stream while maintaining your portfolio hedge. If the market threatens your short puts, you can buy them back early and wait for a better setup.

The key is patience. This isn't a get-rich-quick strategy but a methodical approach to generating consistent income while maintaining portfolio protection. If markets do decline significantly, your LEAPS put will increase in value, potentially offsetting losses in your stock positions while the premium you've collected provides additional cushion.

The Risk Management Reality

Every strategy has risks, and the poor man's covered put is no exception. Your maximum loss is limited to your initial net investment, in our SPY example, that's $7,775 minus the credit we’ve brought in. While this represents 100% of your capital in the trade, it's still dramatically less than the potential unlimited losses from shorting stock.

The strategy performs best in neutral to declining markets, exactly when your portfolio needs protection most. If the market continues higher, you'll face pressure on both sides of your position, but the income you've collected from selling puts provides a cushion against modest moves against you. Meanwhile, your stock positions benefit from the rising market, creating a natural balance.

Why This Matters for Portfolio Management

In today's volatile markets, the poor man's covered put offers something rare: the ability to generate consistent income while providing meaningful portfolio protection. It's particularly attractive when traditional hedging strategies become expensive or when you don't want to tie up massive amounts of capital in defensive positions.

The strategy democratizes sophisticated portfolio hedging, making it accessible to investors who don't have $50,000+ to tie up in a single hedge position. You get institutional-level portfolio protection with retail-friendly capital requirements.

Most importantly, it transforms hedging from a necessary evil into a potential profit center. Instead of paying for expensive put protection that decays daily, you're collecting premium while maintaining your hedge. Your portfolio protection actually pays for itself over time.

The poor man's covered put isn't just a trading strategy, it's a comprehensive approach to portfolio risk management that puts the odds in your favor while keeping your capital free to work in your core positions. In a world where most investors either ignore hedging altogether or pay dearly for basic protection, it offers a compelling solution that combines income generation with strategic portfolio defense.

The next time you're concerned about market volatility but don't want to disrupt your core holdings, resist the urge to buy expensive put protection or do nothing at all. Instead, consider the poor man's covered put using SPY. Your portfolio, and your peace of mind, will thank you.

Probabilities over predictions,

Andy

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