Definition Definition

What Is Short Put? Understanding Short Put with Practical Example

What is Short Put?

A Short Put option is simply the special offer of an option contract. Whenever investors trade a put option, they are referred to as “shorting a put.” While selling a put option, a dealer offers up the license to transfer the underlying assets at a future stage; it is often at a price indicated in the agreement as well as for the number of stocks mentioned in the contract.

Once a dealer employs the short put strategy, their eventual aim is to gain by the sum of the option's value before evaluating the alternatives. If somehow the trader activates the opportunity, the merchant is forced to capture its underlying security at the option strike price and that will also lead to a problem because the option buyer would still utilize their option if somehow the company's share price falls underneath the strike price. 

Understanding Short Put

A short put is made up of minimal parts. To start an option contract depending on one's preferred criteria, individuals only have to place a contract to reap profits. When traders anticipate the stock price to stay above its strike price, you must also sell a put option. If somehow the stock price is higher than just the strike price, they would likely preserve the extra income because the purchaser can't exercise his entitlement. Composing a naked put is dangerous if the price falls underneath the strike price. Instead, dealers create options to apply them to specific tactics.

A short put's return is tied to the premiums obtained; however, the downside might be enormous. First, the put operator must purchase the original cause at the strike price. If the underlying price goes underneath the strike price, the put seller may suffer substantial losses.

Practical Example

Short puts are used among dealers to purchase the underlying securities. James tried to buy a share at $30, but it is already trading at $32. Offering a put option with such a strike price of $30 indicates that even if the price goes under $30, he would be forced to purchase the shares at this same price, something he would have done anyway. The advantage would be that James got a bonus for executing the option. Since he earned a $2 bonus for exercising the option, his initial cost was practically cut to $28. If the underlying value does not exceed $30, he will retain the $2 bonus.

In Sentences

  • The term short put is simply used to indicate the special offer of an option contract.


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