Short Put

Short Put

Post By - Laxmi Mahera
Review By : Rohan Sharma
Updated on : October 26, 2021

Basics Concepts

Context

Outlook

Bullish – You are expecting the stock to rise or stay sideways at a minimum.

Rationale

To pick up short-term premium income as the share develops price strength.
To lower the cost basis of buying a share (if the put is exercised).

Net Position

This is a net credit transaction because you receive a premium for selling the put.

Effect of Time Decay

Time decay works with your naked sold option. To take advantage of the maximum rate of time decay, sell the put in the last month before the option’s expiration.

Time Period to Trade

Last days of month before the option’s expiration

Breakeven = (Put Strike – Put Premium)

Steps to Trading a Long Call

Steps In

Try to ensure that the trend is upward (or sideways) and identify a clear area of support.

Steps Out

Manage your position according to the rules defined in your Trading Plan.
Hopefully the stock will rise or remain static, allowing your sold option to expire worthless so that you can keep the entire premium.
If the stock falls below your stop loss, then exit the position by buying back the puts.
Time decay will be eroding the value of your put every day, so all other things being equal, the put you sold will be declining in price every day, allowing you to buy it back for less than you bought it for, unless the underlying stock has fallen of course.

Exiting the trade

Exiting the Position

Buy back the options you sold or wait for the sold put to expire worthless so that you can keep the entire premium

Mitigating a Loss

Use the underlying asset or stock to determine where your stop loss should be placed.

Advantages and Disadvantages

Advantages

If done correctly, you can use Naked Puts to gain a regular income from rising or range bound stocks.
The Naked Put is an alternative way of buying a stock at a cheaper price than in the current market. This is because if you’re exercised, you’re obligated to buy stock at the low strike price, having already received a premium for selling the puts in the first place.

Disadvantages

Uncapped risk potential if the stock rises.
A risky strategy that is difficult to recommend on its own.

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