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.
-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
-Stock XYZ is trading at $27 a share.
-Sell 26 put for $2.00
|Break Even Price||Strike Price – Premium Received|
|Limited to initial premium received|
|Maximum Profit Scenario||Stock stays at higher than the strike price|
|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|
|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.