Short Put
Writing a put obligates you to buy the underlying stock at the strike price any time until expiry if you are assigned.
Short Put (Writing a Put)
When you write (sell) a put that you don't already own you are said to be "short a put". You could write a put if you think the price of the underlying stock is going to stay the same or rise (when you are neutral or bullish on the underlying stock).
Figure 9 shows the risk and return involved with writing a put with a strike price of $25 for a premium of $5. When you write a put the most you can make is the premium you receive for writing the put option. However you are taking on the risk of large losses if the underlying stock falls.
Figure 9.
If the price of the stock fell to $5 by the expiry date, the put option would have a value of -$20 ($5 current stock price that you could sell the stock for - $25 strike price that you would have to buy the stock for). In this example the put writer would have a $15 loss ($5 the premium received for writing the option - $20 the value of the option you wrote at expiry).
Writing a put has the same risk reward profile as a covered call position.
Naked Put (Uncovered) vs. Short Put Covered by Cash
There are two basic types of short puts covered and uncovered (naked).
When you write a put you are taking on an obligation to buy the underlying stock at the strike price. You can cover this obligation by having enough cash to buy the shares at the strike price. There are several other methods of covering a short put that will be discussed in the Interval Shift Self-Study Online Seminar. If you write a put option that is not covered you are taking on more risk, this is called a naked or an uncovered put.
