Short Put
The Short Put is a bullish option strategy that is designed to profit from the premium selling of the put option. The option seller shorts the put with the hope that the put expires worthless and the options seller, in turn, keeps the entire premium collected for the short put. Although this sounds like a great strategy, I do not recommend any individual investor ever sell ANY naked option(s).
Short Put Risk Profile
Composition
Short Put is simply the sale of one put option.
Risk/Reward
Max Reward: Limited to the premium collected up front for the option.
Max Risk: Unlimited downside potential.
The break even point is where our chart crosses the horizontal axis on the short put chart. The area of importance is where the “hockey stick” looking part of the chart bends and starts going horizontally. That (horizontal) area is going to be the strike price of our option.
When you are a put seller, we have an unlimited downside risk. Because of the unfavorable risk profile (unlimited risk/limited reward), I do not recommend this strategy for any individual investor to utilize on a regular bases. I personally NEVER short naked options. If this strategy is never implemented, the risk of taking a massive loss on an unexpected move is non-existent.
Characteristics
The nature of a put is a short instrument. When selling a short instrument, your creating a long strategy (negative times a negative is a positive). It takes advantage of underlying securities such as stocks and EFTs going up. The short put strategy is best used when you are bullish on market direction.
A short put allows the seller to sell a specific security at a specified price by a specified time. A short put gives the seller the obligation to sell a specific underlying security at a specific price for a limited time.
As market moves in your direction and short put becomes 0 delta it will it will lose all it’s worth and expire worthless by expiration. This is the best case scenario with the short put strategy.
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