sell

Short Put Option Strategy (Best Guide w/ Examples)

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hey everyone Chris here from Project

option and in this options trading

strategies video we're going to talk

about selling put options so let's get

right into it so selling puts also known

as being short puts is a strategy that

consists of selling a put option on a

stock that a trader believes will

increase in price so selling put options

is a bullish strategy so let's go ahead

and look at the strategy characteristics

so the maximum profit potential for a

short put is the amount that you sell to

put 4 times 100 so if you sell a put for

a $5 credit the maximum profit you can

make is $500 now the maximum lost

potential is the put strike price minus

the credit you received times 100 so

let's say you sell a put option with a

strike price of 100 and you collect $5

for that option the maximum loss in that

case would be 100 minus 5 times 100

which would give us a maximum loss of

$9,500 now that maximum loss only occurs

if the stock price goes to 0 basically

means the company has gone out of

business so a maximum loss when selling

puts is very very rare now the

expiration break-even price is the put

strike price minus the credit received

and the estimated probability of profit

is somewhere between 50 and 99 percent

depending on the put strike that you

sell so if you sell further out of the

money put you'll have a higher

probability of profit but with that

you'll have less profit potential

now after expiration if the short put is

in the money the trader who is short

that put will be assigned plus 100

shares of stock so they'll take on a

long stock position of 100 shares now in

regards to assignment risk there is

potential for early assignment since you

are shortly put so if the short put is

in the money you're at risk of being

assigned 100 shares of long stock / put

contract now a short put aside

is only really going to happen if that

short put has very little extrinsic

value left alright so now that you know

the basic characteristics of the short

put strategy let's go ahead and look at

a short put example and take a look at

the expiration risk profile graph so in

this case we have three strike prices

twenty three twenty four twenty five and

we can see the corresponding put prices

for those strike prices in this case

we're going to assume the stock price is

currently trading for twenty five

dollars and we're going to sell the

twenty five-foot for two dollars so

we're selling the put option with a

strike price of twenty five and we're

collecting a two dollar credit for that

option so let's go ahead and take a look

at the expiration risk profile graph for

this option alright so as we can see

right off the bat the maximum profit

potential we can make is two hundred

dollars now that's because we collected

aq dollar credit for the twenty five

foot and the maximum profit is the

credit times 100 which is two hundred in

this case so if the stock price is at

twenty five or above at expiration

this short put will expire worthless and

the person who sold this put will keep

all of the credits that they received

now

the break-even of the strategy is the

put strike price of twenty five minus

the two dollar credit we received which

brings us a break-even of twenty three

dollars so if the stock price is twenty

three dollars at expiration

this short put will have two dollars of

intrinsic value all the extrinsic value

will be gone but since that option

expires of the value of two dollars and

we sold it for two dollars the net

profit is zero now in the lost category

we do see that we have a bit of downside

risk so the maximum loss potential would

be if the stock price went to zero

dollars in which case the maximum loss

would be twenty three hundred dollars

that's because that short put will be

worth twenty five dollars if the stock

goes to zero but since we sold it for

two dollars we only really lose twenty

three dollars times that 100 contract

multiplier so the 23 dollar loss times

100 is a twenty three hundred dollar

loss so now that we've looked at a basic

example

let's talk about the short put Greek

exposures so now that you know what

happens to a short put at expiration

let's talk about how you can figure out

what will happen to a short foot before

expiration so the best way to do that is

to understand a short put Greek

exposures so first of all a short put

has a positive Delta and that's because

put prices decrease on the stock price

rises which leads to profits for anyone

who is short of puts and when you sell a

put you want to put price to decrease

and so stock price increases that leads

to a decrease in put prices which

benefits puts others now on the other

hand when the stock price Falls put

prices increase which leads to losses

for put sellers so the short put

strategy has positive Delta so you

profit when the stock price increases

now a short put strategy has negative

gamma now that means that when the stock

price increases that short puts position

Delta will get closer and closer to zero

and as the stock price Falls the short

puts position Delta look at closer and

closer to plus 100 now in regards to

theta a short put position has positive

theta now that means as time passes the

extrinsic value of that put is going to

be decreasing over time leading to lower

and lower option prices now since you're

sure to put and you want a puts price to

decrease in value that means as its

extrinsic value decays away through time

you'll be profiting just from the

passage of time because that options

price is going to be decreasing as time

passes all else being equal now lastly a

short put position has negative Vega now

an increase in Ivy indicates an increase

in option prices which is bad for put

sellers because if you sell a put you

want the price to go down now as Ivy is

falling that's an indication that option

prices are also falling which is great

for put sellers so when we put all of

these together we learn that a short put

strategy can benefit from an increase in

the stock price to passage of time or a

decrease in implied volatility so

there's really a lot going for the short

put strategy in terms of what

it can't profit the only way it loses

money is if the stock price decreases

fast enough to you know overwhelm the

short IV or the short Vega or the

positive theta alright so let's go ahead

and take a look at three real short put

examples and see how they you know see

how they fared through time as the stock

price was moving in each scenario so

let's look at an example where a trader

realizes the full profit potential on a

short put position so here's the set up

the initial stock price is a hundred and

forty seven dollars and twenty three

cents initial implied volatility is

forty three percent the put strike price

and expiration is the 150-foot expiring

in thirty seven days now we're selling

this put for a credit of eight dollars

and eighty-eight cents so that means the

break-even price is the 150 short strike

- the 888 credit which brings us to a

break-even price of 140 112 now the

maximum profit potential is the credit

times 100 which means the maximum profit

potential is 888 dollars now the maximum

loss potential is essentially the

break-even price times 100 so in this

case it'll be 141 12 times 100 which is

$14,000 and 112 dollars so that maximum

loss potential only occurs if the stock

price Falls to zero so the maximum loss

potential as I said before is a very

very rare scenario because this

particular company would need to go out

of business in the next 37 days so

that's not likely so just understand

that the maximum loss potential when

selling puts is very very rare but of

course it can happen so let's go ahead

and take a look at this short foot

position through time as the stock price

is moving

all right so on the top portion of the

graph we're looking at the stock price

changing relative to the short foot

strike price and the short foots

break-even price and on the bottom graph

we're looking at the price of this 150

foot so as we can see here the stock

price fell through the breakeven price

initially and the short puts price

increased from eight dollars and 88

cents to you know just around 13 dollars

so there was an initial loss on this

short foot strategy because the short

foot got more and more valuable in those

first couple days because the stock

price fell significantly now as we can

see the stock price did rally back and

was basically hanging around the short

foot strike price of 150 for a while but

near expiration the stock price really

took off and it was actually above the

short foot strike price at expiration

now as we can see here as the stock

price was increasing and you know

hanging around the short foot strike

price as time passed that put options

value decreased steadily through time

and since that short foot was out of the

money at expiration it expired worthless

so any trader that was short this put

over this time period kept the full

profit of 888 dollars despite that one

little that one little loss right there

in the beginning so this just shows you

that when you sell a put you can still

make money if the stock price goes

against you or is even you know slightly

below your short foot strike price

because as time passes the extrinsic

value of that foot will be decreasing

over time leading to profits for a short

put seller so this is just a good

example of you know when a short put

strategy works out favorably

all right let's get into example trade

number two so this time we're going to

look at an example where the short put

is in the money at expiration so here's

the set up the initial stock price is

673 dollars and 86 cents initial implied

volatility is 30 percent and we're going

to sell the 675 put expiring in 37 days

and for that put we're going to collect

a credit of twenty four dollars and

fifty two cents so that brings our

breakeven price to the 675 short strike

- the 2452 credit which brings us to a

break-even price of 650 48 now the

maximum profit potential is the credit

times 100 which brings us to two

thousand four hundred and fifty-two

dollars now the maximum loss potential

in this case is 650 48 times 100 which

is sixty five thousand and forty eight

dollars now that max loss only happens

if the stock price falls to zero in the

next 37 days so like I said it's very

unlikely but it can happen so we have to

point it out all right so let's go ahead

and take a look at this short put

positions performance as the stock price

is moving through time

all right so again in the top part of

the graph we're looking at the stock

price versus the short foot strike price

versus the break-even price of the

strategy and in the bottoms on the

bottom graph we're looking at the price

of that short foot so if we pay

attention to the top part of the graph

for a second we can see that as the

stock price initially collapses that

short foots price actually explodes from

24 dollars to over 40 dollars so a

pretty hefty loss and the beginning

there

however the stock price actually does

rally back and kind of hangs around the

short foot strike price of 675 for a

while

now as that's happening we can see that

the we actually have profits on the

short foot position because as we said

before when the time passes a short foot

extrinsic value will decrease and

therefore that will lead to profits for

a short foot seller so even though the

stock price isn't above the short foot

strike price and it's actually slightly

in the money in that in that middle

period there the short foot holder in

this case is actually profiting from

time decay now at expiration we can see

that the stock price is below the short

foot strike price but is above the short

puts break-even price now that means

this strategy did not realize the

maximum profit potential but it actually

did make money because the stock price

was above the break-even price so in

this case the puts value at expiration

was right around 10 dollars and since it

was initially sold for 20 4.52 cents

that gives us a net profit at expiration

of around 14 dollars and 52 cents

so the 24:52 initial price - $10 is

$14.50 of pier profit for the short put

position so this just shows you that

even if the short point is in the money

at expiration you can still make money

on the strategy now in this case since

the short foot was in the money at

expiration it's important to note that

it would have expired to plus 100 shares

of stock so if this short holder

actually held this put through

expiration they would have purchased 100

shares of stock at the short foot strike

price of 6

and $75 per share all right so in this

last example we're going to look at a

short foot position gone wrong so here's

the set up the initial stock price is

109 99 the initial implied volatility is

twenty seven and a half percent and

we're going to sell the 110 foot

expiring in forty-nine days and for that

foot we're going to collect four dollars

and twenty cents so that bringing our

break-even price to 110 minus 420 which

is 105 eighty now the profit potential

on this trade is the 420 credit times

100 which is 420 dollars now the maximum

loss potential is 105 80 times 100 which

is ten thousand five hundred and eighty

dollars now as I said before that max

loss only happens if the stock price

Falls to zero in the next 49 days so

let's go ahead and take a look at this

short foot trades performance as the

stock price is changing all right so

just like the last examples we're

looking at the stock price short foot

strike and breakeven price on the top

graph and on the bottom graph we're

looking at the price of the 110 foot so

as we can see here a stock price kind of

meandered around the shore foot strike

price for the first couple of days but

then the stock price just collapsed so

when that happened we can see that the

stock price was well below the short

foots breakeven price of 105 80 and at

the lowest point the stock price reached

90 dollars which means that short foot

was worth at least $20 so this is a big

loss from selling a foot because we sold

it for four dollars and 20 cents and it

actually reached a value of 20 dollars

at the lowest point so the short foots

value actually increased by 5 X so this

is just an example of you know how you

can actually lose a lot of money when

selling puts but the lost potential is

actually less than buying 100 shares of

stock at the beginning appeared anyways

so for example if you would have just

purchased a hundred shares of stock for

110 dollars your maximum loss potential

would be eleven thousand dollars however

since we decided to sell the 110 foot

and collect a four dollar and 26

reddit for it that brought our breakeven

price or effective share purchase price

to 105 80 so since this short put was

deep in the money at expiration you

would be assigned 100 shares of stock at

the put strike price of $110 per share

however since you collected 420 dollars

in premium that reduces your effective

share purchase price to 105 80 so even

though this position didn't really work

out the best way that it could it still

allowed someone to you know purchase

purchase shares of stock at a discounted

price relative to the current stock

price at the time all right so let's

recap the main concepts that you've

learned from this video so first of all

selling put options is a strategy used

by traders who have a bullish outlook

for a particular stock now selling a put

option has more loss potential than

profit potential but that translates to

a higher probability of profit so

there's always a relationship there

between the amount you can make and the

amount you can lose and the probability

of making money on that trade

so a trader who sells they put benefits

from increases in the stock price

decreases in implied volatility or the

passage of time now those three things

give you you know a lot of flexibility

in the ways that you can profit when

selling puts now a short put strategy

can be closed before expiration by

simply purchasing the put at its current

price to lock in profits or losses so

you don't have to hold the short put to

expiration if the profit reaches a

certain target of yours or so loss gets

to great you can always exit a short put

before expiration now at expiration and

in the money short put will expire to a

long stock position of a hundred shares

per contract so if you're short a put

with a strike price of $125 you will

effectively purchase 100 shares of stock

for $125 per share at expiration however

keep in mind that that premium that you

collected initially actually lowers your

effective purchase price of the shares

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