Short Put Option Strategy
What are the characteristics of this option strategy?
A Short Put Option Strategy is an options trading strategy that involves selling a put option with a strike price lower than the price of the underlying stock or asset. In this strategy, you get to keep the premium received from the sale of the put option, as long as the stock remains above the strike price, and you can make a profit in the process.
Is this a bullish, bearish or neutral strategy?
The Short Put Option Strategy is a neutral strategy that provides downside protection with limited profit potential. You benefit from the stock’s price being held up and pay a premium for the right to sell the stock if its price falls.
Is this a beginner or an advanced option strategy?
The Short Put Option Strategy is an advanced option strategy. It requires knowledge and understanding of the stock market and options trading.
In what situation will I use this strategy?
The Short Put Option Strategy is used when the outlook for the stock is neutral. You can also use it to generate income from stocks you already own.
Where does this strategy typically fall in the range of risk-reward and probability of profit?
The risk-reward for this strategy is more favorable than buying a call option and has a higher probability of profit than a vertical spread. The potential profit and loss depend on the price of the stock, the time remaining before expiration, and the option’s strike price.
How is this strategy affected by the greeks?
The greeks are used to measure the sensitivity of an option’s price to time decay, implied volatility, and the underlying stock’s price. In the Short Put Option Strategy, the delta and theta greeks are used to measure the impact of the passage of time and the stock’s price on the option’s value.
In what volatility regime (i.e VIX level) would this strategy be optimal?
The Short Put Option Strategy is best used when volatility is low and expected to remain low. When the VIX index is low, the price of put options decreases, allowing for more favorable risk-reward scenarios.
How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?
Adjusting this strategy when the trade goes against you involves buying a put option closer to the current market price of the underlying stock. This strategy is relatively easy to adjust, since the profitability of the strategy is determined by the price of the underlying stock and the time remaining before expiration.
Where does this strategy typically fall in the range of commissions and fees?
The cost of buying and selling options, as well as the commissions and fees involved in making trades, are the same for a Short Put Option Strategy as for any other option trading strategy.
Is this a good option income strategy?
Yes, this strategy can be a good option income strategy, depending on the individual’s risk tolerance and preferences. The potential profit is limited, and the potential loss is also limited, so it can offer a good risk-reward ratio with a good chance of success.
How do I know when to exit this strategy?
You should exit the strategy once the stock has gone significantly higher than the price at which the put was sold or when the time remaining before expiration is very small. It is important to set a price target and assign a timeline for when the trade must be closed in order to minimize the risk of suffering a loss.
How will market makers respond to this trade being opened?
Market makers will typically welcome the sale of put options, as they collect commissions from the sale. They are more likely to use this strategy to hedge their existing positions than to make a specific bet on a stock’s direction.
What is an example (with calculations) of this strategy?
For example, let’s say you own 100 shares of Apple (AAPL) stock with a current stock price of $220. You can sell an AAPL put option with a strike price of $210 and a 45-day expiration date at a price of $2.50. This would give you a total premium of $250, which is the maximum profit potential on this trade. If AAPL remains above $210 through expiration, you will keep the $250 premium. If AAPL drops below $210, you will have to buy the stock at $210, and you will have to pay $200 (in addition to the $250 premium) to buy the stock back.
MarketXLS
MarketXLS is an options trading software that can help traders with options strategies including the Short Put Options Strategy. It includes features such as stock and options scanners, historical back testing and more, allowing traders to easily track and analyze options prices and trends. With MarketXLS, traders can easily execute this strategy and monitor the performance of their trades. For more information on vertical and spread strategies, please refer to the Vertical Options Spread and Short Guts Long Guts Option Strategies.
Here are some templates that you can use to create your own models
Short Put Option Strategy
Diagonal Spread with Puts Option Strategy
Long Butterfly with Puts Option Strategy
Long Put Option Strategy
Put Ratio Back-Spread
Bear Put Spread Option Strategy
Bull Put Spread Option Strategy
Collar Option Strategy
Long Calendar Spread With Puts Option Strategy
Long Calendar Spread with Puts Option Strategy
Risk Reversal Option Strategy
Short Put Ladder
Short Straddle Option Strategy
Iron Butterfly Option Strategy
Short Strangle Option Strategy
Iron Condor Option Strategy
Short Gut
Synthetic Short Straddle with Puts
Butterfly for Shorts Spread
Conversion Strategy
Search for all Templates here: https://marketxls.com/templates/
Relevant blogs that you can read to learn more about the topic
Short Put Option Strategy (With Excel Template)
Making Sense of Option Time Value
Maximizing Profits with a Bull Put Spread Strategy
Reverse Iron Butterfly Options Strategy (Using MarketXLS Template)
Short Put Ladder Options Strategy (Using Excel Template)