Name: Short Put
Setup: Sell (short) a put
Bias: Neutral to Bullish
Break-Even: Strike – Premium received for the sale of the put
Max Profit: Limited: To premium received
Max Loss: Limited: If the underlying falls below your strike price losses will occur – but are limited due to the fact the underlying cannot fall below $0.00
Margin: Short call requires no cash outlay so margin is used. Margin is calculated by taking the greater of:
- 25% of the underlying security value minus the out-of-the-money amount plus the premium received or
- 10% of the underlying security value plus the premium received
Time Decay: As time passes the put will drop in value which is what you want. You want your short put to lose value so it expires worthless or allows you to buy it back (close it) for a lower price.
Implied Volatility: Over the life of the option you want implied volatility to decrease, thus decreasing the price of your option. An increase in implied volatility will increase the price of your option.
Notes: Short puts can profit no matter which direction the underlying moves. Losses will only occur below break-even. Selling deep out-of-the-money puts can return high probability plays. Short puts can also be turned into cash-secured puts. This is setup by holding enough cash to buy the shares if the underlying falls below the strike price. This is a good way to pick up shares at a reduced price. For example if the underlying is currently trading at $65 and you are willing to purchase the stock at $60 then you could sell the put on the 60 strike. If the underlying falls below 60 you will be assigned the shares and now have a long stock position. This is more typical for picking up long-term holdings.
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