Short Put (Naked Put)
Sell a put to collect premium. Maximum profit is the premium received, while risk is substantial if the stock crashes.
Overview
A Short Put is a bullish strategy where you sell a put option to another trader. You receive a "premium" (cash) immediately. In exchange, you are now legally obligated to buy 100 shares of the stock if it drops below the strike price.
The Strategy of the "House"
Many institutional investors sell puts because it's like being the "house" in a casino. Most options expire worthless, so by selling them, you are collecting small amounts of money with a high statistical probability of success.
Payoff and Risk
- Max Profit: The credit you received upfront.
- Max Loss: Large. If the stock goes to zero, you still have to buy it at the strike price.
- Break-even: .
The Greeks
- Delta: Positive. You want the stock to rise or stay flat.
- Theta: Positive. This is your primary engine. You get paid for every day that passes.
- Vega: Short. You want the market to calm down and for "fear" (IV) to decrease.
Naked Put vs. Cash-Secured Put
Technically a Short Put is "Naked" if you don't have the cash in your account to actually buy the shares. This involves margin (borrowing power). A Cash-Secured Put is the same trade, but with the cash sitting safely in your account to fulfill your obligation.
Summary
The short put is the first step for many income-seeking traders. It allows you to profit from a stock being "boring" or slightly bullish, which is something you can't do just by buying the stock directly.