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.
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.