Short Put: Definition, How It Works, Risks, and Example

Key takeaways

• A short put (also called writing a put or a naked put) is an options position where you sell a put option and receive a premium.
• The seller (writer) is obligated to buy the underlying asset at the strike price if the option is exercised.
• Profit is limited to the premium received; losses can be substantial if the underlying falls sharply.
• A common conservative approach is a cash‑secured put—holding enough cash to buy the shares if assigned.

What is a short put?

A short put is an options strategy in which you sell (write) a put option. The buyer of the put has the right to sell the underlying asset to you at the strike price before or at expiration. In return for taking on that obligation, you receive an option premium up front.

The seller is “short” the put, while the buyer is “long” the put. If the option expires worthless (underlying price stays above the strike), the seller keeps the premium as profit. If the option is exercised (underlying price falls below the strike), the seller must buy the shares at the strike price, potentially incurring a loss.

How it works (mechanics)

• Opening vs closing: Selling a put to open creates a short put position. Buying a put to close offsets or closes a short put.
• Market view: Short puts are typically used when you are neutral to moderately bullish on the underlying — you expect it to stay above the strike.
• Outcomes at expiration:
• Underlying > strike: option likely expires worthless; seller keeps premium.
• Underlying ≤ strike: option may be exercised; seller buys shares at strike (assignment) and effectively pays strike minus the premium received.
• Cash requirement: If assigned, you must have cash (or margin capacity) to buy 100 shares per contract at the strike price.

Risks and reward

• Reward: Limited to the premium received per contract. Example: $2 premium × 100 shares = $200 max gain.
• Risk: Potentially large/downside loss. The worst-case loss occurs if the underlying goes to zero and equals (strike − premium) × 100 per contract.
• Liquidity/early exercise: Options can be exercised before expiration (American-style), so assignment can occur before maturity.
• Margin/capital: Selling puts typically requires margin or cash to cover potential assignment; margin rules vary by broker.

Example

Imagine you write one put contract on XYZ with:
* Strike = $32.50
Premium received = $5.50
Contract size = 100 shares

Outcomes:
* If XYZ ≥ $32.50 at expiration: option expires worthless; your profit = $5.50 × 100 = $550.
* If XYZ goes to $0 at expiration: your loss = (32.50 − 5.50) × 100 = $2,700 (you paid $32.50 per share, offset by the $5.50 premium).

You can close the position before expiration by buying the same put (which locks in profit or loss), or be assigned and take ownership of the shares.

Practical tips

• Consider cash‑secured puts: hold enough cash to purchase the shares at the strike to avoid margin risk.
• Use short puts when you’re comfortable owning the underlying at the strike price (possibly at an effective discount equal to the premium).
• Monitor the trade and have an exit plan (buy to close, roll the option, or accept assignment).
• Understand broker margin requirements and the tax implications of option trades.

Summary

A short put is a way to generate income or to acquire a stock at an effective discount, but it carries downside risk if the underlying falls sharply. Profit is limited to the premium; potential loss can be large. Managing position size, securing cash for assignment, and having an exit plan are essential practices when selling puts.