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Strategy · Single-Leg Basics

SHORT PUT (NAKED)

BullishUndefined riskIntermediate

Overview

Sell a put option to collect premium. Profit if the stock stays above the strike through expiration. If assigned, you must buy 100 shares at the strike price regardless of how far the stock has fallen below it.

What it does

You collect premium in exchange for agreeing to buy shares at the strike if assigned. If the stock stays above the strike, the option expires and you keep the premium as pure profit. If the stock falls through the strike, you end up owning 100 shares at an effective cost of strike minus premium — a lower price than market at entry.

Structure

sell 1 put

Setup

  1. 1.Choose a liquid stock or ETF you're bullish or neutral on.
  2. 2.Select an OTM put strike at or below your desired purchase price.
  3. 3.Set aside cash equal to Strike × 100 (cash-secured) or confirm margin.
  4. 4.Sell 1 Put option — you receive the premium immediately.
  5. 5.Monitor the position and be prepared to accept shares if assigned.

Max profit

Premium received. E.g., $420 from selling a $315 put at $4.20.

Max loss

Substantial. If the stock falls to zero: (Strike − Premium) × 100. E.g., ($315 - $4.20) × 100 = $31,080.

Breakeven

Strike Price − Premium Received. E.g., $315 − $4.20 = $310.80.

When to use

When you're neutral to bullish and willing to own the stock at the strike price. Works best when implied volatility is above average.

When to avoid

If you can't afford to buy 100 shares at the strike or the underlying has severe binary event risk (earnings, FDA, etc.).

Example trade

Stock: MSFT trading at $325
Expiration: 45 days
Sell 1 MSFT $310 Put at $4.20 (credit $420)

Max Profit: $420
Breakeven: $310 - $4.20 = $305.80
Max Loss: ~$30,580 (if MSFT → $0)

If MSFT stays above $310: Put expires worthless, keep $420
If MSFT drops to $295: Assigned at $310, effective cost = $305.80; unrealized loss = $1,080

Common mistakes

  • ×Selling puts on stocks you would never actually buy, then regretting assignment.
  • ×Ignoring earnings dates that can trigger overnight gaps far below the strike.
  • ×Adding more short puts into a sharp sell-off and compounding exposure.
  • ×Failing to monitor margin — deep ITM options can force broker liquidations.
  • ×Entering after IV has already collapsed — little premium for the risk taken.

FAQ

Is a short put the same as a covered call?

Payoffs look similar, but covered calls own shares and sell calls, while short puts sell downside insurance without owning stock. Margin, dividends, and assignment mechanics differ.

Can I roll a short put if the stock drops?

Yes. Buy back the current contract and sell a later-dated or lower-strike put for a net credit. Rolling defers but does not eliminate risk.

What happens if I'm assigned early?

You book the option's P&L up to assignment and instantly own 100 shares at the strike. The premium lowers your cost basis, but theta no longer applies.

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