The Complete Guide to Option Strategies: Advanced and Basic Strategies on Stocks, ETFs, Indexes, and Stock Indexes

CHAPTER 10

Short Put

In Chapter 9, we discussed a short call. Writing a put option has many of the same characteristics as a short call option, except a put option profits in the opposite direction. This chapter provides an overview of a short put, presents numerous examples, and then moves to beyond the basics, including a discussion of rolling, a cash-secured put, selling puts for income, and margin.

OVERVIEW

A short put involves the sale of a put option and is a bullish and neutral strategy. A short put has limited reward potential and unlimited risk. A put typically increases in value from a decline in the underlying stock or volatility expansion and declines in value from a decline in the underlying stock, time decay, or volatility contraction. Following is a summary profile of a short put:

Direction: Bullish/neutral.

Profit potential: Limited to premium collected.

Risk: Unlimited. (Technically, strike price minus premium collected.)

Time decay: Positive (theta).

Volatility: Increase is negative (negative theta), decrease is positive.

Delta: Positive.

Gamma: Negative.

Theta (time): Positive.

Vega (volatility): Negative.

Breakeven: Stock at strike price minus premium collected.

Margin: Generally, 20 percent standard margin, or portfolio margin for equities.

Exercise and assignment: Can be assigned if in-the-money.

How to exit: Offset in closing transaction, assignment, or let expire worthless.

IRA: Permitted if fully funded.

Main advantages: Time decay; requires less capital ...