Learn trading ideas & strategies from TradeKing's experts

Upcoming Live Events
More live events...
Learn it. Trade it.

Open your TradeKing account today!

Upcoming Live Events
More live events...

Short Put

The Setup

  • Sell a put, strike price A
  • Generally, the stock price will be above strike A

Who Should Run It

All-Stars only

NOTE: Selling puts as pure speculation, with no intention of buying the stock, is suited only to the most advanced option traders. It is not a strategy for the faint of heart.

When to Run It

You're bullish to neutral.

The Sweet Spot

There's a large sweet spot. As long as the stock price is at or above strike A at expiration, you make your maximum profit. That's why this strategy is enticing to some traders.



About the Security

Options are contracts which control underlying assets, oftentimes stock. It is possible to buy (own or long) or sell (“write” or short) an option to initiate a position. Options are traded through a broker, like TradeKing, who charges a commission when buying or selling option contracts.

Options: The Basics is a great place to start when learning about options. Before trading options carefully consider your objectives, the risks, transaction costs and fees.

The Strategy

Selling the put obligates you to buy stock at strike price A if the option is assigned.

When selling puts with no intention of buying the stock, you want the puts you sell to expire worthless. This strategy has a low profit potential if the stock remains above strike A at expiration, but substantial potential risk if the stock goes down. The reason some traders run this strategy is that there is a high probability for success when selling very out-of-the-money puts. If the market moves against you, then you must have a stop-loss plan in place. Keep a watchful eye on this strategy as it unfolds.

Maximum Potential Profit

Potential profit is limited to the premium received for selling the put.

Maximum Potential Loss

Potential loss is substantial, but limited to the strike price minus the premium received if the stock goes to zero.

Break-even at Expiration

Strike A minus the premium received for the put.

TradeKing Margin Requirements

Margin requirement is the greater of the following:

  • 25% of the underlying security value minus the out-of-the-money amount (if any), plus the premium received
  • OR 10% of the underlying security value plus the premium received

NOTE: The premium received from establishing the short put may be applied to the initial margin requirement.

After this position is established, an ongoing maintenance margin requirement may apply. That means depending on how the underlying performs, an increase (or decrease) in the required margin is possible. Keep in mind this requirement is subject to change and is on a per-contract basis. So don't forget to multiply by the total number of contracts when you're doing the math.

As Time Goes By

For this strategy, time decay is your friend. You want the price of the option you sold to approach zero. That means if you choose to close your position prior to expiration, it will be less expensive to buy it back.

Implied Volatility

After the strategy is established, you want implied volatility to decrease. That will decrease the price of the option you sold, so if you choose to close your position prior to expiration it will be less expensive to do so.

Options Guy's Tips

  • You may wish to consider ensuring that strike A is around one standard deviation out-of-the-money at initiation. That will increase your probability of success. However, the lower the strike price, the lower the premium received from this strategy.
  • Some investors may wish to run this strategy using index options rather than options on individual stocks. That's because historically, indexes have not been as volatile as individual stocks. Fluctuations in an index's component stock prices tend to cancel one another out, lessening the volatility of the index as a whole.


Tools

610 Watchlist
Watchlist Watch real-time price data like a hawk for the securities that matter most to you.

617 Technical Analysis Image small
Technical Analysis Powered by Recognia, our Technical Analysis suite spots emerging chart patterns to help you find your next great trade.

1290 Mutual Fund screener small image
Mutual Fund Screener Pin-point the right mutual fund for your investing goals. Create customized screens based on your own search criteria.

More tools...

Related Strategies

414 Short Strangle Image
Short Strangle A short strangle gives you the obligation to buy the stock at strike price A and the obligation to sell the stock at strike price B if the options are assigned. You are predicting the stock price...

398 Long Butterfly w/ Puts Image
Long Butterfly Spread with Puts A long put butterfly spread is a combination of a short put spread and a long put spread, with the spreads converging at strike B. Ideally, you want the puts with strikes A and B to expire worthless...

534 Buy Index Mutual Fund
Buy Index Mutual Funds An index mutual fund is typically comprised of most or all of the stocks that make up a particular index. The reason to own an index mutual fund is to take advantage of broad-based bullish activity...

More strategies...