Short Put

What Is a Short Put?

A short put is an options contract strategy where an investor sells, or "writes," a put option. The seller receives a payment called a premium up front. In return, the seller takes on the obligation to buy 100 shares of the underlying stock per contract at the agreed strike price if the buyer exercises the option before it expires.

The buyer of the put has the right, but not the obligation, to sell shares at the strike price. The seller has no say in whether the buyer exercises. If the option is assigned, the seller must purchase the shares at the strike price, even if the market price has fallen well below it.

How a Short Put Works

The outcome depends on where the stock trades relative to the strike price at expiration:

• If the stock stays above the strike, the put expires worthless and the seller keeps the full premium as profit.
• If the stock falls below the strike, the buyer will likely exercise, and the seller buys shares at a price above the current market value.
• The seller's profit is capped at the premium received, while the potential loss can be large, since a stock can fall substantially.

Short puts are often used by investors who are willing to own a stock at a lower price and want to be paid while they wait. They are also used to earn income in sideways or rising markets.

Risks and Considerations

The main risk of a short put is that the stock price drops sharply. The seller's loss equals the strike price minus the stock's value at assignment, minus the premium received. Because a stock can theoretically fall to zero, the maximum possible loss is large relative to the premium collected. Brokers typically require a margin or cash reserve to cover this obligation.

Short puts also carry the risk of early assignment for American-style options, though this is more common near dividend dates or when the option is deep in the money.

Understanding the breakeven price is important. For a short put, it equals the strike price minus the premium per share. Investors often compare the premium to the amount of capital they must set aside.