Short Put

A short put means selling a put option. The seller collects a premium and agrees to buy the underlying at the strike price if assigned. If the underlying stays above the strike through expiration, the put expires worthless and the seller keeps the premium. If it falls below, the seller must buy shares at the strike, which may be well above the market price. Short puts are bullish to neutral and are used both to earn income and as a way to buy stocks at a lower effective price.

Payoff at a glance#

Worked example#

Short put vs owning the stock#

A short put has a similar risk profile to owning shares below the strike, but with a capped upside.

The short put wins in flat and mildly falling markets and loses less in a crash, but misses big rallies. See Put-Call Parity for why a short put resembles a covered call.

Cash secured vs naked puts#

• Cash secured put: the seller holds enough cash to buy the shares if assigned. This is a conservative way to sell puts and is allowed in many accounts. See Cash-Secured Put.
• Naked put (on margin): the seller posts only margin. This allows larger positions but adds leverage and margin call risk. See Margin.

The risk of selling puts#

Short puts win often and lose rarely, but the rare losses can be large. Selling puts is similar to selling insurance: steady premiums, with occasional big payouts during crashes. In sharp market declines, many put sellers suffer losses at the same time, and implied volatility spikes, which makes positions look worse before expiration. See Theta Harvesting and Fat Tails.

Managing a short put#

• Buy back early after capturing much of the premium.
• Roll down and out to a lower strike and later expiry if challenged, accepting that this extends the trade.
• Accept assignment if you are happy to own the shares at the effective price.
• Avoid earnings and major events unless intended.
• Convert to a bull put spread by buying a lower put to cap the risk. See Bull Put Spread.

Common mistakes#

• Selling puts on stocks you would not want to own.
• Using margin to sell too many puts.
• Chasing high premiums, which usually signal high risk.
• Ignoring correlation: puts on several similar stocks can all lose together.

Frequently asked questions#

What is a short put?#

Selling a put option to collect premium, with the obligation to buy the underlying at the strike price if assigned.

What is the maximum loss on a short put?#

The strike price minus the premium received, multiplied by the contract size, which happens if the underlying falls to zero.

Is selling puts a good way to buy stock?#

It can be. If assigned, you buy at the strike minus the premium, which is below the price when you sold the put. If not assigned, you keep the premium.

Next, combine shares and calls in the Covered Call.