Short Put

AAA

DEFINITION of 'Short Put'

A type of strategy regarding the selling of a put option. The option itself is a security in its own right, as it can be purchased and sold. Should the holder of the option believe that the price of the underlying security will increase before the contract’s expiry date, he may buy the underlying stock. Or he may sell the put option (hence “short put”), which requires him to buy the stock, should the put buyer demand he do so.

INVESTOPEDIA EXPLAINS 'Short Put'

A short put position is effectively a form of insurance, guarding the investor against losses beyond a certain point. When the investor enters a short put position, the security’s price must rise in order for the strategy to turn a profit. Furthermore, the price must rise by at least the price of the put option (the “premium”). The higher the price rises, the more money the investor makes. Conversely, should the investor have initially erred and the security’s price then fall, the strategy would lose money. The upper bound on the losses is the value of the stock. 

When an investor enters into a short put strategy, he or she is locking the price of an underlying security at the strike price and keeping the premium for writing the put option. Entering into a short put position is considered a risky strategy because an investor is bound by a profit limited to the premium received for selling the put option, but exposed to a higher potential loss only bounded by the underlying security going to zero minus the premium received. 

To understand the basics of selling put options, see "Introduction To Put Writing."

RELATED TERMS
  1. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
  2. Wingspread

    To maximize potential returns for certain levels of risk (while ...
  3. Volatility Smile

    A u-shaped pattern that develops when an option’s implied volatility ...
  4. Nadex

    Nadex stands for the North American Derivatives Exchange, a regulated ...
  5. Exchange-Traded Binary Options

    Exchange-traded binary options, regulated by the CFTC, let you ...
  6. VolDex® Implied Volatility Indexes

    A measure of option cost and implied volatility. The VolDex index ...
Related Articles
  1. Options & Futures

    Bear Put Spreads: A Roaring Alternative To Short Selling

    This strategy allows you to stop chasing losses when you're feeling bearish.
  2. Options & Futures

    Put-Call Parity And Arbitrage Opportunity

    Look at trades that are profitable when the value of corresponding puts and calls diverge.
  3. Options & Futures

    How To Sell Put Options To Benefit In Any Market

    As long as the underlying stocks are of companies you are happy to own, put selling can be a lucrative strategy.
  4. Options & Futures

    Put Option Basics

    Put option allow investors to hedge an investment they own or speculate in an investment they don't own. Find out more about this type of option and how it can work in an investor's favor.
  5. Options & Futures

    Manage Risk With Trailing Stops And Protective Put Options

    Using the right strategy can lower the risk of failure and protect your profits.
  6. Options & Futures

    Forecasting Market Direction With Put/Call Ratios

    Options are not only trading instruments but also predictive tools that can help us gauge the feelings of traders.
  7. Markets

    Hedging With Puts And Calls

    This trading strategy can reduce your risk - but only if you use it effectively.
  8. Options & Futures

    Profiting From Stock Declines: Bear Put Spread Vs. Long Put

    If you're bearish, you should compare the risk/reward characteristics of these two strategies.
  9. Options & Futures

    The Perks of Trading Coffee Options

    As more people begin to trade coffee, we explain how coffee options work, who uses them, what drives valuations, and the risks and rewards.
  10. Trading Strategies

    Top Day Trading Instruments

    Day trading is an intense and often appealing activity. Investopedia provides the list of top financial instruments for day trading.

You May Also Like

Hot Definitions
  1. Risk Averse

    A description of an investor who, when faced with two investments with a similar expected return (but different risks), will ...
  2. Fixed-Charge Coverage Ratio

    A ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and leases. It is calculated ...
  3. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  4. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  5. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  6. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
Trading Center