The short put option strategy is a bullish options trading strategy with a limited profit potential with substantial theoretical loss if stock goes down to zero value.
Trade
-Sell 1 put option
Note: like most options strategies, calls can be purchased in-the-money (ITM), at-the-money (ATM), or out-of-the-money (OTM).
Preference : Sell an 16-20 delta OTM put
Trade Example
-Stock XYZ is trading at $27 a share.
-Sell 26 put for $2.00
Profit and Loss Diagram
Short Put Summary
| Break Even Price | Strike Price – Premium Received |
| Maximum Profit | Limited to initial premium received |
|---|---|
| Maximum Profit Scenario | Stock stays at higher than the strike price |
| Maximum Loss | Substantial if stock goes to $0.00 |
| Maximum Loss Scenario | Stock tanks to $0.00 |
| Why Trade | If you are moderately bullish on a stock you can use this option strategy. This strategy provides some cushion for error |
| When to Trade | Stock Assumption : Bullish Volatility : When volatility is high, so you gather more premium to open the trade |
| When to Close | When the trade is making 50% of max possible profit |
| Legs | 1 leg |
| Passage of time | Positive. With passage of time, the value of this option decreases which is positive for your portfolio |
| Increase in volatility | Negative. With increase in volatility, the value of option increases. |