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Direction
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Moderately bullish
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Strategy Type
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Income
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Legs
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Sell put
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Max Reward
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Limited to premium received
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Max Risk
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Exercise price
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Time Horizon
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Long or short
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Risk Profile
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Very high
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Payoff Diagram
Description
Short puts allow the seller to receive income from the premium paid by the option buyer. If the stock price falls below the exercise price the seller however pay up the difference.
Steps Involved
Sell put
Rational
Investors can sell this option when they expect the stock price to rise.
Short Put Tutorials
In this Minc Webinar, Stuart McClure discusses selling Naked Puts, including the reasons speculators sell puts; receiving premium in exchange for an obligation to buy, and why the strategy works best in a neutral/bullish market.
This strategy is sometimes used in conjunction with the buy and write or covered call strategy and becomes the first step to purchasing shares. It is important to note the difference between speculative options trading and investing when trading naked puts.