Short Put - At a Glance

Strategy

• Short Put

Alternative Name

• Naked Put
• Uncovered Put

Pre-Requisite Strategy Knowledge

• Long Stock
• Short Stock
• Long Put

Legs of Trade

• 1 leg
• Sell 1 XYZ put

Sentiment

• Bullish

Example

• Short 10 XYZ January 50 puts for $1.63, less fees and commissions

Rule to Remember

• n/a

Max Potential Profit (GAIN)

• Net Premium Collected

Break-Even Point

• The breakeven point occurs when XYZ stock price is trading equal to the strike price less the net premium collected.

Max Potential Risk (LOSS)

• Significant but capped

Ideal Outcome

• XYZ price declines significantly below the strike price less net premium collected

Margin Requirement

• Yes

Early Assignment Risk

Equity options in the United States can be exercised on any business day, and the holder of a short stock options position has no control over when they will be required to fulfill the obligation. Therefore, the risk of early assignment must be considered when entering positions involving short options. Early assignment of stock options is generally related to dividends. However, for puts, early exercise is generally favorable when the interest on the short stock is worth more than the value of the corresponding call option.

The short put strategy has early assignment risk.

• If the stock price is below the strike price of the short put, a decision must be made if early assignment is likely. If you believe assignment is likely and you do not want a long stock position, then appropriate action must be taken. Before assignment occurs, the risk of assignment can be eliminated by: (1) Purchasing the put option to close out your short put position.
• If early assignment of a short put does occur, stock is bought. If you do not want a long stock position, you can close it out by selling the stock in the marketplace. Important consideration: Assignment of a short put might also trigger a margin call if there is not sufficient account equity to support the short stock position.

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