What is the downside cushion for a covered call or cash-secured put?
The downside cushion is the percentage drop in the underlying that the premium can absorb before the position is in unrealized loss; it is a quick "how much margin of safety did I sell at this strike" check.
Formula
(spot − (strike − premium)) ÷ spotCash-secured put:
(spot − (strike − premium)) ÷ spotWorked example
Underlying at $580, sell 30-day $570 covered call for $4.20 premium. Effective break-even at expiration = $570 − $4.20 = $565.80. Downside cushion = ($580 − $565.80) ÷ $580 = 2.45%.
Common misinterpretation
Treating downside cushion as "how much downside I am protected against." If the stock drops 10% in 30 days, you are still long the stock; the premium only offsets $4.20 of the loss. The "cushion" is the price drop at which you start to lose money net of premium, not the price drop you are insured against.
Limitations
- Linear approximation — does not account for the change in option value during the cycle.
- Assumes you hold to expiration; closing early changes the realized cushion.
Tools that use this metric
Primary references
References cite the source institution where the underlying definition or rule is published. OptionIncomeTools does not redefine standardized options terms; it ranks and presents data using widely accepted definitions.
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Educational only — not investment advice. See the disclaimer and methodology. Material methodology corrections are logged at corrections.