Short Put

AKA NAKED PUT; UNCOVERED PUT

Short or uncovered put - Options Playbook

The setup

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

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.

Options guys 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.

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NOTE: Graph details and assumptions…

The animated line depicts the profit and loss of the strategy with 24 days to expiry and attempts to display how it changes as the expiration date approaches. This line is theoretical in nature and may not represent real market conditions.

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

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You’re bullish to neutral.

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.

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