Short Put

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.

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.

Break-even at Expiration

Strike A minus the premium received for the put.

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.

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.

Margin Requirement

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.