Short Put Option Strategy

 

With the short put option  the investor is betting on the fact that the stock will rise or stay flat until the option expires. If the put option expires worthless, out of the money (above the strike price), then the trader keeps the entire premium, which represents their maximum profit on the trade. When it comes to single successful options traders selling a put option is one of two  market strategies, the other being the long call option.

As seen on the graph, the seller of the short put is obligated to purchase the stock, in most cases 100 shares per contract, at the strike price A if the buyer wants to exercise the contract.

Selling a put option can be valuable to investors as it allows them to increase their income, taking premium from other traders who are betting the stocks would fall. Therefore, when using the short put strategy, the investor receives the option premium cushioning themselves from a flat market with little movement. Nevertheless, investors need to sell their puts sparingly because they are on the hook to purchase shares if the stock falls below the strike-price by expiration.

An investor should keep a close eye on volatility levels when selling put options. The higher the volatility, the more risk to the trader, stock market patterns but the higher premium they receive for taking on this type of options trade.

Short puts are used to achieve better buying prices on the overpriced stocks. Here an investor would sell the puts at much lower strike prices, at the level where the investor would prefer to buy the stock.

When to Use the Short Put Strategy

If an investor believes a stock is going to stay above a specific price point or they wish to purchase the stock at a lower price point, selling a put option should be a consideration. triple bottom stock  Here the investor will sell put options with a specific expiration date in mind in exchange for receiving a premium. If the stock stays above the strike price (the price the investor will have to buy the stock), the investor will keep the entire premium as profit.


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