What is a 'Short Put'

A short put refers to when a trader opens an options trade by selling or writing a put option. The trader who buys the put option is long that option, and the trader who wrote that option is short. The writer (short) of the put option receives the premium (option cost), and the profit on the trade is limited to that premium. 

Breaking Down the 'Short Put'

A short put is also known as an uncovered put or a naked put. If an investor writes a put option, that investor is obligated to purchase shares of the underlying stock if the put option buyer exercises the option. The short put holder could also face a substantial loss prior to the buyer exercising, or the option expiring, if the price of the underlying falls below the strike price of the short put option. 

Short Put Mechanics

A short put occurs if a trade is opened by selling a put. For this action, the writer (seller) receives a premium for writing an option. The writer's profit on the option is limited to that premium received. 

Initiating an option trade to open a position by selling a put is different than buying an option and then selling it. In the latter, the sell order is used to close a position and lock in a profit or loss. In the former, the sell (writing) is opening the put position.

If a trader initiates a short put, they likely believe the price of the underlying will stay above the strike price of the written put. If the price of the underlying stays above the strike price of the put option, the option will expire worthless and the writer gets to keep the premium. If the price of the underlying falls below the strike price, the writer faces potential losses.

Some traders use a short put to buy the underlying security. For example, assume you want to buy a stock at $25, but it currently trades at $27. Selling a put option with a strike of $25 means if the price falls below $25 you will be required to buy that stock at $25, which you wanted to do anyway. The benefit is that you received a premium for writing the option. If you received a $1 premium for writing the option, then you have effectively reduced your purchase price to $24. If the price of the underlying doesn't drop below $25, you still keep the $1 premium.


The profit on a short put is limited to the premium received, but the risk can be significant. When writing a put, the writer is required to buy the underlying at the strike price. If the price of the underlying falls below the strike price, the put writer could face a significant loss. For example, if the put strike price is $25, and price of the underlying falls to $20, the put writer is facing a loss of $5 per share (less the premium received). They can close out the option trade (buy an option to offset the short) to realize the loss, or let the option expire which will cause the option to be exercised and the put writer will own the underlying at $25.

If the option is exercised and the writer needs to buy the shares, this will require an additional cash outlay. In this case, for every short put contract the trader will need to buy $2,500 worth of stock ($25 x 100 shares).

Short Put Example

Assume an investor is bullish on hypothetical stock XYZ Corporation, which is currently trading at $30 per share. The investor believes the stock will steadily rise to $40 over the next several months. The trader could simply buy shares, but this requires $3,000 in capital to buy 100 shares. Writing a put option generates income immediately, but could create a loss later on (as could buying shares).

The investor writes one put option with a strike price of $32.50, expiring in three months, for $5.50. Therefore, the maximum gain is limited to $550 ($5.50 x 100 shares). The maximum loss is $2,700, or ($32.50 - $5.50) x 100 shares. The maximum loss occurs if the underlying falls to zero and the put writer needs to still buy the shares at $32.50. The loss is partially offset by the premium received.

  1. Put Option

    A put options gives the owner the right to sell a specified amount ...
  2. Naked Put

    A naked put is an options strategy in which the investor writes ...
  3. Vanilla Option

    A vanilla option gives the holder the right to buy or sell an ...
  4. Put

    An option contract giving the owner the right, but not the obligation, ...
  5. Strike Price

    Strike price is the price at which the underlying asset of a ...
  6. Protective Put

    A protective put is a risk-management strategy that investors ...
Related Articles
  1. Trading

    Beginners Guide To Options Strategies

    Find out four simple ways to profit from call and put options strategies.
  2. Trading

    Options Strategies for Your Portfolio to Make Money Regularly

    Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.
  3. Trading

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  4. Trading

    Option trading strategies: A guide for beginners

    Options offer alternative strategies for investors to profit from trading underlying securities. Learn about the four basic option strategies for beginners.
  5. Trading

    When Should I Sell A Put Option Vs A Call Option?

    Beginning traders often ask not when they should buy options, but rather, when they should sell them.
  6. Trading

    What Is A Bull Put Spread?

    In a bull put spread, the options trader writes a put on a security to collect premium income and perhaps buy the security at a bargain price.
  7. Investing

    Why Options Trading Is Not for the Faint of Heart

    Trading options is not easy and should only be done under the guidance of a professional.
  8. Trading

    Cut Down Option Risk With Covered Calls

    Covered call writing has pros and cons, If used with the right stock, they can be a great way to generate income. Learn this strategy today.
  9. Trading

    The Basics Of Option Price

    Learn how options are priced, what causes changes in the price, and pitfalls to avoid when trading options.
  10. Trading

    A Quick Guide To Debt Options

    Options on debt instruments provide an effective way for investors to manage interest rate exposure and benefit from price volatility, learn more today.
  1. When is a put option considered to be 'in the money?'

    Learn about put options, how these financial derivatives work, and when put options are considered to be in the money related ... Read Answer >>
  2. When does one sell a put option, and when does one sell a call option?

    An investor would sell a put option if her outlook on the underlying was bullish, and would sell a call option if her outlook ... Read Answer >>
  3. What is index option trading and how does it work?

    Learn about stock index options, including differences between single stock options and index options, and understand different ... Read Answer >>
Trading Center