The Short Put strategy is an options trading technique used when you are bullish or neutral on an asset. By selling a put option, you collect a premium upfront, while taking on the obligation to buy the asset at the strike price if the buyer exercises the option.
This strategy works best when the asset price stays above the strike price until expiry.
A short put, also called naked put involves selling a put option, which gives the buyer the right to sell the asset to you at the agreed strike price before expiration.
As the seller, you earn the premium immediately, but must be prepared to buy the asset if its price falls below the strike price.
A short put strategy is suitable when you believe the asset’s price will remain stable or move slightly upward. It allows you to earn regular income by selling put options on stocks you are comfortable owning, collecting the premium as profit if the option expires worthless.
This approach also works well if you are open to buying the asset at a lower price. Being assigned simply means purchasing the stock at the strike price, which may align with your long-term investment goals.
| Feature | Description |
|---|---|
| Market View | Bullish or Neutral |
| Risk | Significant (if asset price falls sharply) |
| Reward | Limited to premium received |
| Breakeven | Strike Price: Premium |
| Obligation | Required to buy the asset if assigned |
| Margin Needed | Yes, for uncovered/naked puts |
A stock is trading at ₹100. You sell a put option with a strike price of ₹95 and receive a ₹4 premium. If the stock stays above ₹95, you keep the premium as profit. If it falls below ₹95, you may be assigned to buy the stock, with a break-even point at ₹91.
This strategy suits mildly bullish views and a willingness to buy the stock at a discount.
The stock stays above ₹95 (for example, at ₹98). The put expires worthless and you keep the ₹4 premium as profit.
The stock drops to ₹90. The buyer exercises the put and you are obligated to buy the
stock at ₹95.
Effective loss = ₹95 - ₹90 - ₹4 = ₹1 per share
Your breakeven point is ₹91 (strike price ₹95 minus premium ₹4).
This shows how a short put strategy can generate income in stable markets but may lead to a loss if the stock falls below your breakeven.
A short put strategy allows you to earn steady income by collecting premiums on options you sell. It also serves as a potential method to acquire quality stocks at lower prices, making it appealing for long-term investors.
This approach is especially useful when you are looking for bullish entry points into long-term holdings, as being assigned means buying the stock at a discounted price. The strategy offers defined profit potential through the premium received and comes with assignable risk, giving you more control over your investment approach.
A short put strategy is best for traders with a bullish bias on the underlying asset, as it allows them to profit if the price remains stable or rises. It also suits investors who want to enter positions at discounted levels, giving them the opportunity to buy the stock below its current market price if assigned.
This strategy is best used by those who understand and can manage the margin requirements, as assignment risk and capital commitment must be carefully considered.
Short puts should not be used carelessly because selling them involves a commitment to purchase the asset if it is assigned. It is important to constantly have sufficient funds or margin on hand to manage possible assignments, particularly in unpredictable markets.
Even in the event of a market drop, this method is most effective when used to equities that you are truly comfortable owning. In addition to lowering stress, being ready for ownership also helps you match the plan with your long-term financial objectives.