A short put is one of the most popular ways to generate income from options. Instead of buying options and paying a premium, you sell them and collect the premium. This guide will show you exactly how short puts work and when to use them.
What is a Short Put?
A short put means you sell a put option to someone else. When you sell a put, you collect the premium upfront. In exchange, you agree to buy the stock at the strike price if the buyer exercises the option.
Simple version: You get paid now for agreeing to buy a stock at a lower price in the future. If the stock stays above the strike price, you keep the premium and never have to buy anything. Easy money.
How Short Puts Work
You sell a put option at a strike price below the current stock price
You collect the premium immediately
You wait until expiration
At expiration, one of two things happens:
Stock stays above strike: The put expires worthless. You keep the entire premium.
Stock falls below strike: You must buy 100 shares at the strike price. You still keep the premium.
Example
Stock XYZ is trading at $100. You think it will stay above $90.
- Current price: $100
- You sell a $90 put expiring in 30 days for $2.00
- You collect $200 immediately (100 shares x $2.00)
Outcome 1: Stock stays at $100 or higher. The put expires worthless. You keep $200. No shares change hands.
Outcome 2: Stock drops to $85. You must buy 100 shares at $90, even though they are worth $85. Your cost basis is $88 per share ($90 minus the $2 premium). You own shares at a small loss, but less than if you had bought at $100.
Why Sell Puts?
- Generate income: Collect premium without owning the stock
- Get paid to wait: If you want to buy a stock anyway, why not get paid while waiting for a lower price?
- High probability: You can sell puts far below the current price and still collect decent premium
- Time decay works for you: Every day that passes, the option loses value, which benefits you
The Risks of Short Puts
The main risk is being forced to buy a stock at the strike price even if it has fallen much lower. In theory, a stock can go to zero, so your maximum loss is the strike price minus the premium received.
For example, if you sell a $50 put for $2, your maximum loss is $48 per share ($4,800 per contract). This happens if the stock goes to zero. In practice, this is rare, but you need to be comfortable owning the stock if assigned.
Cash Secured vs Naked Puts
There are two ways to sell puts:
- Cash secured put: You keep enough cash in your account to buy the shares if assigned. Safer and allowed in most accounts.
- Naked put: You use margin instead of keeping full cash. Riskier but more capital efficient. Requires higher approval levels.
Tip: If you are new to selling puts, start with cash secured puts. Only move to naked puts once you understand the risks and have a margin account with the right approval level.
Best Stocks for Selling Puts
- Stocks you would be happy to own at the strike price
- Stocks with decent implied volatility (higher premium)
- Stable companies that are unlikely to collapse overnight
- Stocks you have researched and believe in long term
Tips for Selling Puts
- Choose strikes carefully: Sell at prices where you would genuinely be happy to buy the stock
- 30-45 days to expiration: This is the sweet spot for time decay
- Avoid earnings: Stock can gap down big on bad earnings
- Manage your winners: Consider closing early at 50% profit to free up capital
- Have a plan for assignment: Know what you will do if you end up owning the shares
Short Put vs Long Put
These are opposite strategies:
- Short put: You sell. You collect premium. You profit if the stock stays flat or goes up.
- Long put: You buy. You pay premium. You profit if the stock goes down.
Track Your Short Puts
Pro Trader Dashboard automatically tracks all your short put trades. See your premium collected, assignment rate, and total income generated over time.
Summary
A short put is a strategy where you sell a put option and collect premium. You profit when the stock stays above the strike price. If the stock drops below the strike, you must buy shares at that price. It is a great way to generate income or get paid to wait for a stock you want to own at a lower price.
Want to learn more options strategies? Check out covered calls or credit spreads.