A short put (or naked put) is when you sell a put option, collecting premium upfront. You're agreeing to buy 100 shares at the strike price if the buyer exercises.
How It Works
Tesla is $200:
- Sell a $190 put for $3 per share ($300 total)
- You collect the $300 immediately
- If Tesla closes above $190 at expiration, the option expires worthless and you keep the $300
- If Tesla falls to $150, you're assigned 100 shares at $190 ($19,000 cost)
Risk Profile
Maximum Profit: The premium collected ($300 in the example)
Maximum Loss: The strike price × 100 - premium collected = ($190 × 100) - $300 = $18,700
Why Traders Use It
- Collect premium upfront
- Bullish outlook (stock should stay above strike)
- Can turn into stock ownership at a "discount" (if you wanted to own the stock anyway)
Requirements
Brokers require margin/buying power to cover the potential assignment. You must have $19,000 buying power available if selling a $190 put.
Management
- Close early if profit target is hit (30-50% max profit)
- Let it expire if it's clearly OTM
- Roll down and out if it goes against you
Related: Cash-Secured Put, Short Call, Income Strategies
