Short Put

A single sold put: the credit received is the most that can be gained, and the loss grows as the underlying falls toward zero.

Also called Naked put, Cash secured put

Outlook

Bullish

Family

Basic

Level

Advanced

Legs

1 leg

Expirations

1 expiration

Opens for

Credit

Maximum profit

Limited

Maximum loss

Limited

Legs at the reference strikes this page's diagrams are drawn from

Leg	Side	Contract	Ratio	How the strike is chosen
A	Short	Put 97.5	1	Delta 30

What it is

One put option sold. The seller receives the premium immediately and takes on the obligation to buy 100 shares at strike A if the holder exercises.

The premium is the entire gain, fixed at entry and never larger. The risk runs the other way: from the strike down to zero, less the premium received. It is described as limited only in the arithmetic sense that an underlying cannot go below zero — the maximum loss on a 97.50 strike is 97.50 per share less the credit, which is a large number, not a small one.

The payoff

At expiration

At expiration the position keeps the full credit at every price above strike A, then falls in a straight line as the underlying drops below it.

Flat and positive above A — the credit, whatever the underlying does up there — and falling one for one below it.

Break-even is the strike minus the credit received. Between break-even and the strike the position is assigned and still profitable; below break-even it loses.

How it behaves before expiration

Today, before expiration

Today's value is a smooth curve below the expiration line, furthest below it near the strike, converging on the line as expiry approaches.

The dashed curve sits below the expiration line, and that is the whole economics of a sold option in one picture: the seller cannot realise the full credit until the time value they sold has decayed away.

The gap is widest near the strike. A short put that is comfortably out of the money is already worth almost all of its final value; one at the money is not, however favourable the price looks today.

The Greeks

Delta is positive, between 0 and 1. The position gains as the underlying rises — the same sign as a long call, from the opposite side of the market.

Gamma is negative, and this is the defining risk of the structure. As the underlying falls toward the strike the position’s delta grows against the seller, so each further fall hurts more than the last. A short option decelerates into gains and accelerates into losses.

Theta is positive. Time is the seller’s income.

Vega is negative. A rise in implied volatility raises the price of the option the seller is short, which is a loss on the position even with the underlying unchanged.

Where it lives in the volatility environment

A short put is a short volatility position sold for premium. Practitioners generally describe premium selling as being compensated for bearing the risk of a move, and observe that the compensation is larger when implied volatility is high — which is also when the moves being insured against are larger.

Both halves of that sentence are descriptive.

What can go wrong

• Assignment. A short put can be assigned at any time before expiry for American-style options, and the result is 100 long shares per contract at the strike, requiring the capital to hold them.
• Gap risk. The loss is not gradual. A gap through the strike skips every price in between, and no stop placed on the option will have traded there.
• Negative gamma near expiry. The acceleration is sharpest in the final days and closest to the strike, which is exactly where a “nearly worthless” short option sits.
• Dividends. A short put becomes more likely to be assigned early when the underlying’s forward price falls, which a dividend does.
• The credit is the ceiling. No favourable move, however large, pays more than the premium received on the day the position opened.

Building it in Option Panel

Open Build Strategy and pick Short Put. The builder seeds one short put and resolves the strike by delta, percentage or points from the price, offset, exact strike, or a target premium.

Selecting by premium is worth knowing about here: it asks the chain for the strike whose mid price is nearest a target credit, and states the price it actually matched, rather than assuming the requested credit was available.

Back to the encyclopaedia · What-if analysis in the docs

Related strategies

• Bull Put Spread — the same view with a long put below it, which caps the loss and reduces the credit.
• Long Call — the other bullish primitive, paid for rather than sold.
• Short Call — the mirror image.