As a trader, you know what is a short put vs a long put. For more on what is a short put spread, please read on.
What is a short put?
It refers to when the trader opens a position by writing or selling put options of a particular security. Traders who purchase put options are going long, while the ones writing it are going short.
The short put writer receives a premium, the option’s value, but the market limits the profit to the put options (premium).
Short put options are naked puts or uncovered puts. So if you write put options, you’ll have to purchase the shares of the stocks after the buyer exercises their duties to the shares. Short put holders face a considerable loss before the option expires or before the buyer exercises their duty.
The principle behind short puts is profiting from an increase in the stock price by collecting the premium linked with the sale of short puts.
What is a short put option strategy?
Generally, selling put options obligate the writer to purchase the underlying asset when it reaches the strike price. Therefore, you have to adhere to the strike price option.
It can earn you a profit, or you might end up getting a loss on the expiry date or the stock reaches its strike price. When selling put options with no intention of purchasing them back, you might want the put to expire worthless.
The put strategy has a likelihood of low profit if the value of the stock remains above the strike price when it expires. On the other hand, a short put writer can make a substantial loss if the price drops below the set strike price.
The main reason why some traders love this strategy is the high likelihood of gaining some profit when selling very out-of-cash puts. To be on the safe side, you’ll have to include a stop-loss.
Is short put a good strategy?
If you already know what is a long put, then you might be wondering if short puts are great strategies. Well, you’re not alone; if you have tried long put, then you must be wondering if short puts are profitable.
Basically, you can either purchase the stock at a lower cost than its market price. This means that you can win either way, as per the below short put example.
If the price of an underlying financial asset is at $100, but its price drops to $110. The investor can sell it at the strike price. You can still get a profit, but if the price continues to rise or fall to $100, then the premium will be pure profit.
If the stock’s price drops below $100 (the strike price), then the investor will purchase it, resulting in a profit. As you can see, if you short put options this way, then you will win either way.
Short Put vs a Long Put
Long put options work perfectly if you’re expecting the price of the asset to decline sharply in the future. On the other hand, short puts are bullish strategies that stipulate that the value of the underlying asset drops past a certain level.
Long put works ideally in a bearing market, while short put works for bullish strategies. In a short put, the strike price is the premium, while in a long put option, the strike price is the premium an investor pays. You can break even when the premium equals the strike price.
Is the short put a bullish or a bearish strategy?
Short put options are bullish trading strategies where your target will be that the price of the asset won’t drop below a certain level. The short put strategy includes you entering a position by selling a Put Option. Fortunately, short put exposes you to unlimited risks but with low-profit potential.