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Short Put – Naked Put – Option Strategies

April 9, 2015 By Jeff White

Selling a put short is an uncovered or naked position aiming to collect premium from the sale of the option in expectation of neutral to bullish price action.

If a short position in the underlying stock is already held, then selling a put against that short stock is known as a covered put.

Naked puts involve downside risk in the stock.  For example, if a put is sold in XYZ for $0.60 at the $20 strike, and XYZ is trading at $19 by expiration, the put has moved ITM.  The trader has the choice to either buy back the short option (for a loss since the option would be trading around $1), or get assigned a long stock position in XYZ at $20 (the strike price).  The premium collected from selling the put is kept, which effectively reduces the basis for the long stock position if assigned.  In this case, the trader would be long the stock with a basis of $19.40 ($20 strike price less $0.60 premium collected from put sale).

Short puts have a positive delta, so they are a bullish position unless paired with short stock.

Return to the main trading glossary page to learn more terms.

Filed Under: Investor Education, Uncategorized

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