Writing a put obligates you to buy the underlying stock at the strike price any time until expiry if you are assigned.
short put is created when long stock position is combined with a short call of the same series. It is so named because the established position has the same profit potential a short put.
Limited Profit Potential
The formula for calculating maximum profit is given below:
- Max Profit = Premium Received – Commissions Paid
- Max Profit Achieved When Price of Underlying >= Strike Price of Short Call
Risk / Reward
- Maximum Loss: Unlimited in a falling market.
- Maximum Gain: Limited to the premium received for selling the put option.
When to use
When you are bullish on market direction and bearish on market volatility.
Like the Short Call Option, selling naked puts can be a very risky strategy as your losses are unlimited in a falling market.
Although selling puts carries the potential for unlimited losses on the downside they are a great way to position yourself to buy stock when it becomes “cheap”. Selling a put option is another way of saying “I would buy this stock for [strike] price if it were to trade there by [expiration] date.”
A short put locks in the purchase price of a stock at the strike price. Plus you will keep any premium received as a result of the trade.
- Advantages and Limitations of writing covered calls (Mild)
- why trading plan is needed? (Weak)
- Trading with Double Diagonal Options (Weak)
- Covered Call- Option Trading (Weak)
- STOCK MARKET TERMS (Tenuous)
- How does Stock Market functions? (Tenuous)
- Predictability and Trends in stock market (Tenuous)
- Absolute vs. Relative Return (Tenuous)
- How to deal in shares ? (Tenuous)
- Fosback Index and Mutual Funds. (Tenuous)
- Linear Regression Channels (LRC) (RANDOM - Tenuous)
