When you think about options trading, the first thing that comes to mind is probably buying calls and puts. These are the most basic option trades and are what most people think of when they hear the word “option.” However, there is another type of option trade that can be even more profitable: short puts. In this blog post, we will discuss what short puts are, how they work, and why they can be a risky but rewarding investment strategy.
So, what exactly is a short put? A short put is simply a put option that you have sold, or written. When you sell a put option, you are agreeing to buy the underlying security at the strike price if the option is exercised. Short puts are used when you think the price of the underlying security will go up, or at least not fall too much.
The reason why short puts can be so profitable is because you are collecting premium from the person who buys the put option from you. This is money that you get to keep regardless of what happens with the underlying stock. So, if the stock goes up, you keep the premium and the buyer of the put option loses money. If the stock goes down, you may have to buy the stock at a higher price, but you still keep the premium. And if the stock stays the same, you keep the premium and don’t have to do anything.
However, while short puts can be profitable, they are also risky. This is because you are essentially betting that the stock will not go down too much. If it does, you could end up losing a lot of money. Short puts are best used when you are confident in your analysis and believe that the stock will not fall too much.
If you’re thinking about adding short puts to your investment strategy, it’s important to remember that they are a risky proposition. But if you’re confident in your ability to pick stocks and understand the market, they can be a great way to boost your profits.
This is just one of the concepts covered in the FINRA SIE Program! Want to learn more? Check out Achievable’s SIE prep course to learn more!