Sell-Write or Covered Put Options

A Covered Put Option is the exact opposite of a Covered Call Option.

If you are shorting a stock, and you are neutral to slightly bearish about the stock's potential, then a Covered Put Options Strategy (also known as a Sell-Write) can be a way to receive enhanced premiums, and can also offset some losses if the stock appreciates in value.

For every 100 shares of a stock that you are shorting, you would buy one put option, which controls 100 shares of stock. 

Construction – Short stock, short one put for every 100 shares of stock shorted.  
 
Function – To enhance profitability of short stock position and to provide limited protection against adverse stock movement.  
 
Bias – Neutral to slightly bearish.  
 
When to Use – When you feel the stock will trade slightly down or in a tight range for a period of time.  
 
Profit Scenario – If stock falls, profit will be enhanced by premium received. If stock stagnates, you will profit from premium received from put sale.  
 
Loss Scenario – If stock trades higher than the point defined by your stock sales price plus the premium received from put sale, you will lose dollar for dollar. Put premium received will act as stock loss offset.  
 
Key Concepts – If stock trades down aggressively, you will only profit down to a stock price defined by the strike price minus option premium. If the stock continues down below that point (breakeven), you will incur lost opportunity.  
 
Further, if stock closes below strike price, stock will be assigned to you unless necessary adjustment is made. Time decay helps the position. Philosophically identical to Buy-Write except in opposite  stock direction. 

Covered Put Example (Source: TheOptionGuide.com)

Suppose XYZ stock is trading at $45 in June. An options trader writes a covered put by selling a JUL 45 put for $200 while shorting 100 shares of XYZ stock. The net credit taken to enter the position is $200, which is also his maximum possible profit.

On expiration in July, XYZ stock is still trading at $45. The JUL 45 put expires worthless while the trader covers his short position with no loss. In the end, he gets to keep the entire credit taken as profit.

If instead XYZ stock drops to $40 on expiration, the short put will expire in the money and is worth $500 but this loss is offset by the $500 gain in the short stock position. Thus, the profit is still the initial credit of $200 taken on entering the trade.

However, should the stock rally to $55 on expiration, a significant loss results. At this price, the short stock position taken when XYZ stock was trading at $45 suffers a $1000 loss. Subtracting the initial credit of $200 taken, the resulting loss is $800.