Home › Guides › Options: the math

Cushion, how far the stock can fall before you lose

Cushion is the gap between today's share price and the price where your trade starts losing. It's the first number an option seller should know, and the one most people never write down.

Options guide · 7-minute read · Updated 2026-10-26

What cushion means, and how to work it out

Cushion is how far the stock can fall before your position loses money. You measure it from today's price down to your break-even. The premium you collected is what creates it.

For a Cash-secured put, the break-even is the Strike price minus the premium. For a Covered call, it's what you paid for the shares minus the premium. Cushion is today's price minus that break-even, written as dollars and as a percent of the price.

That's the whole idea. Two formulas, one for each half of the wheel strategy.

Selling a put:

1. Break-even = strike − premium.
2. Cushion in dollars = today's price − break-even.
3. Cushion in percent = cushion in dollars ÷ today's price.

Selling a covered call:

1. Break-even = your share cost − premium.
2. Cushion in dollars = today's price − break-even.
3. Cushion in percent = cushion in dollars ÷ today's price.

Notice the put's cushion has two parts: the distance from the price down to the strike, plus the premium. The call's cushion is only the premium, unless the shares have already risen above your cost.

A worked example (an illustration, not a trade idea)

A made-up stock, XYZ, trades at $50.

The put. You sell one 30-day put with a $45 strike for $1.00. You collect $100 and set aside $4,500.

• Break-even: $45 − $1 = $44.
• Cushion: $50 − $44 = $6, or 12% of the price.

The call. Instead, you own 100 shares bought at $50 and sell one 30-day $55 call for $1.00.

• Break-even: $50 − $1 = $49.
• Cushion: $50 − $49 = $1, or 2% of the price.

Same stock, same premium. One trade can absorb a 12% fall. The other can absorb 2%.

What the cushion looks like outcome by outcome

Here's the put, expiry by expiry, so you can see where the cushion runs out.

Above $44, the trade is fine. Below it, every dollar the stock falls costs you $100 on the contract. The cushion tells you where that line is. It says nothing about whether the stock stops there.

What a cushion does and doesn't do

It does three useful things:

• It turns a vague "the premium protects me a bit" into a number.
• It lets you compare two trades on the same stock. A $45 put and a $47 put have different cushions.
• It gives you a level to watch. If the stock trades below your break-even with weeks to go, that's a decision point, not a surprise.

It does not do these things:

• It doesn't cap your loss. Only a bought option or a sold share does that.
• It doesn't tell you the odds. A 12% cushion on a quiet utility and a 12% cushion on a stock that swings 10% a week are not the same trade.
• It doesn't grow after you sell. The premium is fixed the moment you're filled.

Compare the cushion to how the stock moves

A cushion only means something next to the stock's normal swing. Two quick checks:

1. Look at the chart. How far did the stock fall in its worst month of the past year? If that's 20% and your cushion is 6%, a normal bad month blows through it.
2. Look at the expected move. The options market prices a typical range for the expiry. Our guide on the expected move shows how to read it. If your break-even sits inside that range, the market thinks reaching it is ordinary.

Implied volatility drives both the premium and the expected move. A fat premium gives a wide cushion on a stock the market expects to move a lot. That's not extra protection. It's a fair price for a wilder ride.

The same thinking applies to a short call. A 2% cushion means almost any dip puts the shares underwater. That's why the covered call's real risk is the share price, not the option. See drawdown math for option sellers for what a 30% fall does to a book of these.

Write it down before you sell

Before every trade, write four things on your ticket or in your journal:

• Today's price.
• Your break-even.
• The cushion in dollars and percent.
• The stock's biggest one-month drop in the past year.

If the fourth number is bigger than the third, you're relying on luck. That's allowed, but you should know it. Across a whole cycle of puts and calls, the break-even moves every time you collect a premium or get assigned. Break-even math for the wheel tracks that running number. The options math cheat sheet has every formula on one page.

Try it today on paper: pick a stock, open the Options chain about 30 days out, and work the cushion for the put one strike below the price and the put two strikes below. Note how the cushion grows and the premium shrinks. Then check your numbers in the options profit calculator.

Questions