Short Put (2)
Outcome 1: Profit
With a short put position, you are committing to a bullish stock sentiment, believing that the stock will increase in value and increase in price. The profit potential is limited to the net premium collected. Let’s now assume we are correct in our sentiment and the stock price rises.
To calculate our profit on the position when we sold our contracts, we use the following formula:
Profit = Net Premium Collected
Example
Stock XYZ is trading at $50 and you sell 10 XYZ Jan 50 puts for $1.63.
A week later, stock XYZ is trading higher at $52.75.
*Unrealized profits are those that potentially exist; realized profits occur when you close out or trade out of the position.
Our maximum profit is limited to the net premium collected.
Outcome 2: Loss
With a short put position, you have collected money (net premium) to establish your options position. The trade-off is significant, but capped, loss exposure to downside moves in the stock price. Remember, the stock price can decline to $0.
Max Loss = [Strike Price – Net Premium Collected] x Quantity of Shares x Multiplier
Example
Stock XYZ is trading at $50 and you sell 10 XYZ Jan 50 puts for $1.63.
At expiration, stock XYZ is trading lower at $46.
*Unrealized profits are those that potentially exist; realized profits occur when you close out or trade out of the position.
Our maximum loss is significant, but capped.
Outcome 3: Breakeven
The breakeven price for a short put strategy occurs when the stock is trading at a price equal to the strike price less the net premium collected.
In our example, the breakeven stock price equals $48.37 ($50 - $1.63 = $48.37, not including fees and commissions).
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