What Is a Short Put?

By Markets Fool.com

Image source: Getty Images.

Continue Reading Below

There are plenty of ways to profit on a stock's movement beyond investing in the actual stock itself. Options provide a nearly endless array of strategies, due to the countless ways you can combine buying and selling call option(s) and put option(s) at different strike prices and expirations.

A call is an options contract that gives the owner the right to purchase the underlying security at the specified strike price at any point up until expiration. A put is an options contract that gives the owner the right to sell the underlying asset at the specified strike price at any point up until expiration.

If you sell a put, then you are taking the short side of that contract and may be obligated to purchase shares of the underlying security at the specified strike price if the put is exercised. You will receive an upfront premium for selling the put.

Cash-secured or naked

Two common scenarios for selling a put are cash-secured puts and naked puts. Typically, the goal in both of these strategies is for the stock to remain below the strike price, in which case it will expire worthless and you keep the premium.

Continue Reading Below

A cash-secured put requires you to maintain sufficient funds in your account at all times to over the purchase of the underlying stock. In contrast, a naked put has much lower capital requirements, and your broker/dealer may extend margin credit in the event that the put is exercised.

Selling puts is also a strategy for purchasing a stock you already wish to own. If you sell a put with a strike price that you are comfortable purchasing the stock at, you are effectively getting paid to buy the stock. This can also create a stream of income.

Spreads

Beyond those two strategies, there are countless other strategies that can be created with spreads, which involve buying and selling various combinations of calls and/or puts with different strike prices and expirations. However, spreads are beyond the scope of this article.

The $15,834 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $15,834 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.Simply click here to discover how to learn more about these strategies.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.