Short Put Strategies
When selling puts with no intention of buying the stock, you want the puts you sell to expire worthless. This strategy has a limited profit potential if the stock remains above strike A at expiration, but substantial potential risk if the stock goes down. The reason some traders run this strategy is that there is a high probability for success when selling very out-of-the-money puts. Keep a watchful eye on this strategy as it unfolds.
Maximum Potential ProfitPotential profit is limited to the premium received for selling the put.
Maximum Potential LossPotential loss is substantial, but limited to the strike price minus the premium received if the stock goes to zero.
Break-even at ExpirationStrike A minus the premium received for the put.
Margin Requirements25% of the underlying security value minus the out-of-the-money amount (if any), plus the premium received
- OR 10% of the underlying security value plus the premium received
NOTE: The premium received from establishing the short put may be applied to the initial margin requirement.
After this position is established, an ongoing maintenance margin requirement may apply. That means depending on how the underlying security performs, an increase (or decrease) in the required margin is possible.
Keep in mind this requirement is subject to change and is on a per-contract basis. So don't forget to multiply by the total number of contracts when you're doing the math.
For this strategy, time decay is your friend. You want the price of the option you sold to approach zero. That means if you choose to close your position prior to expiration, it will be less expensive to buy it back.
Implied VolatilityAfter the strategy is established, you want implied volatility to decrease. That will decrease the price of the option you sold, so if you choose to close your position prior to expiration it will be less expensive to do so.
You may wish to consider ensuring that strike A is around one standard deviation out-of-the-money at initiation. That will increase your probability of success. However, the lower the strike price, the lower the premium received from this strategy.
Some investors may wish to run this strategy using index options rather than options on individual stocks. That's because historically, indexes have not been as volatile as individual stocks. Fluctuations in an index's component stock prices tend to cancel one another out, lessening the volatility of the index as a whole.