What is a short put?
A short put, or a short-term put, is a type of option that obliges the seller to buy stock from the holder of the option at a set price (strike price) within a limited timeframe.
Short put options can be used when you think the stock price is about to go up. By shorting a put, you receive an option premium, which is all the profit you can expect from this type of put option. You can also sell a short put if you do not have the money to purchase the underlying stock on your account. Such puts are called naked, or uncovered.
This trading strategy is quite risky as the stock price can go down. In this case you will be obliged to buy the stock at a price higher than the market price. So make sure you think your actions through before shorting a put.
Example of a short put
Let’s say the stock you are interested in is currently trading at $40. You would be much more willing to buy it at a lower price, so you sell a short put with the strike price of $35 for $3.
If the stock price stays above $35, the buyer will not exercise the put option and you will still have your option premium of $3.
But if the stock price falls below $35 and the buyer decides to sell it, you will be obliged to buy the stock at the higher strike price.
Short vs put
Short selling means selling the stock that you don’t own. To do this, you borrow the stock from a broker, sell it, and then buy it at a lower price. Shorting a put means selling your obligation to buy a stock you don’t own at a set price from someone who has bought such option. Even though both trading strategies involve selling, they are quite different. Short selling involves selling and then buying the stock while shorting a put may result in the purchase of the stock if the buyer of the put option decides to exercise it.
Between short selling and shorting puts, short selling is more profitable. With short puts your profit is limited to the premium you received for your option while with short selling your potential profits are unlimited. Both are also more profitable than simply buying the stock. However, these strategies are quite risky as prices can move in the direction unfavorable for the sellers (up for short selling and down for short puts) and result in huge losses.
2022-07-21 • Updated