What Is Short Put Option Strategy?

29 January 2025
4 min read
What Is Short Put Option Strategy?
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You may have heard about the short put option strategy. Short put option is one trading strategy that traders can deploy when they have a bullish or neutral outlook. The flexibility that comes with a put option trade allows traders to make predictions about the turn of the market and make money while doing so.

Learn all about the short put option strategy—an interesting method of making money in the stock market—here.

What Is Short Put Option?

A short put is an options trading strategy that a trader can use to generate regular income in a sideways or rising market. This strategy involves selling a put option without you actually owning the underlying asset. In other words, you can sell securities that you don’t own yet with the help of a short put in the hope of making a profit on the transaction when you buy back the security at the right price.

Imagine you enter an options trade by selling or writing a put option on a security. The profit of the short put option is related and limited to the option premium or the value of the put option.

The underlying approach for the short put is to profit from the increase in the price of the security/stock by collecting the premium associated with the sale during the writing of the short put. However, this strategy may backfire on you if the price of the security declines. Similar to a short call option, the risk in the short put option strategy is unlimited. 

A put option gives the buyer the right but not the obligation to sell a security at a predetermined price on a specific date. However, a seller of the put option is obligated to purchase the underlying security.

Short put obligates you to buy the underlying security at a predetermined strike price in the future if the buyer decides to sell. Even if the price of the security goes down than your expectations, you become obligated to purchase the shares of the underlying stock if the put option buyer exercises the option.

Also Read : what is Short Call Strategy

Understanding Short Put Option with an Example

Imagine stock ABC is trading at Rs 100. A trader expects the price of the stock to rise to Rs 150. Since the trader has a bullish outlook, he shorts a put option of the 130 strike price which is trading at a premium of Rs 200.

If the price of ABC rises to Rs 150, the sold put option becomes out-of-the-money (OTM) and will expire worthless allowing the trader to pocket the premium. If the stock price expires at the Rs 130, the put option will be at-the-money (ATM) and will expire worthless allowing the trader to pocket the premium. However, if the price of ABC falls to Rs 80, the premium of the put option may see a significant rise and may lead to the trader booking substantial losses. 

How is Short Put Different from Long Call

Both the short put and long call option strategies benefit from a rise in the price of the underlying asset. The key difference is the risk and reward between the two strategies. A long call has a potential unlimited upside and the downside is limited to the premium paid. Meanwhile, the short put option strategy’s profit is limited to the premium of the option while the risk exposure is unlimited.

Impact of Theta 

Theta is an Option Greek which measures how quickly the premium of an option will decline. Over time the premium of an options contract will decline since it is a derivative and has no intrinsic value. The impact of theta is the highest on at-the-money (ATM) call options while the impact is lesser on in-the-money (ITM) options. Due to the impact of theta, a short put trade becomes safer over time as the premium declines. 

In Conclusion

A short put option allows you ample flexibility to ride on the potential profits of an increasing stock price. However, it is accompanied by substantial risks. In case the price of the underlying asset drops significantly, as a put option seller, you can face significant losses. Additionally, the profit potential with a short put option is limited.

Short put is usually deployed by experienced traders who have a neutral or bullish market outlook. Short put carries a significant risk. Thus, if you are a novice trader, it is best to take some time to understand this strategy well before you start using it to make profits from trading.

Disclaimer: This content is solely for educational purposes. The securities/investments quoted here are not recommendatory.

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. Groww Invest Tech Pvt. Ltd. (Formerly known as Nextbillion Technology Pvt. Ltd) Ltd. do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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