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.
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:
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.
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 ...