Short put option graph
This page explains short put option payoff. You can find similar pages for the other basic option positions here: A short put option position is a bullish strategy with limited upside and limited but usually very high risk. The position is initiated by selling a put option with the intention to buy it back later at a lower price or waiting until expiration and hoping it will expire out of the money. See the payoff chart below:. The payoff is inverse of long put positionwhich is the other side of your trade.
Below the strike price your profit declines in proportion with the underlying price. In this example we have sold one contract of a 45 strike put option for the price of 2.
The maximum you can gain from a short put trade is the amount you receive at the beginning when selling the put. If the option expires worthless, there is no more cash flow from the trade and you keep all the initial cash, which is also your total profit. The worst case scenario is when the underlying price drops to zero.
Because the underlying is now worthless, you lose the amount equal to the strike price per share. Total loss from the trade is therefore equal to the strike price less the initial amount you have received when selling the put.
The risk-reward ratio is usually quite unfavourable with a short put position, as the maximum possible loss is usually much higher than potential profit of the trade. If you have seen the explanation of long put option payoff formulasyou will find the short put payoff formulas are exactly the same, only with opposite signsas you are now taking the other side of the trade.
The break-even point of a short put position is exactly the same as long put break-even. This particular short put trade is profitable if the underlying ends up above If you don't agree with any part of this Agreement, please leave the website now. All information is for educational purposes only and may be inaccurate, incomplete, outdated or plain wrong.
Macroption is not liable for any damages resulting from using the content. No financial, investment or trading advice is given at any time. Home Short put option graph Tutorials About Contact. Tutorial 1 Tutorial 2 Tutorial 3 Tutorial 4. Short put option graph Put Payoff Diagram and Formula.
Short Put Payoff Diagram A short put option graph put option position is a bullish strategy with limited upside and limited but usually very high risk. See the payoff chart below: Short Put Maximum Profit The maximum you can gain from a short put trade is the amount you receive at the beginning when selling the put.
Short Put Maximum Loss The worst case scenario is when the underlying price drops to zero. Short Put Risk-Reward Ratio Short put option graph risk-reward ratio is usually quite unfavourable with a short put position, as the maximum possible loss is usually much higher than potential short put option graph of the trade.
Short Put Payoff Formulas If you have seen the explanation of long put option short put option graph formulasyou will find the short put payoff formulas are exactly the same, only with opposite signsas you are now taking the other side of the trade.
There are again two components of the total profit or loss: Short Put Payoff Summary Short put strategy is directional and bullish. It is also a short short put option graph strategy, as the value of a put option declines when volatility decreases, which means your short put position becomes more profitable. You want the underlying price to end up above the strike price, so the put option expires worthless and you keep the entire premium. Short put strategy has limited upside, equal to the cash you get when selling the put option in the beginning.
This is the maximum you can gain from the trade. It has limited risk unlike a short call trade whose risk is unlimitedequal to the strike price short put option graph the initial option price. However, in most cases the option price is much lower than the strike price, which means the maximum possible loss is typically much higher than the potential profit.
When running this strategy, you may wish to consider selling the put slightly out-of-the-money. The premium received for the put you sell will lower the cost basis on the stock you want to buy. A general rule of thumb is this: Cash-secured puts can be executed by investors at any level. You want the stock price to be just below strike A at expiration.
Remember, the goal here is to wind up owning the stock. Potential profit is limited to the premium received from selling the put. Potential loss is substantial, but limited to the strike price if the stock goes to zero. The premium received from establishing the short put may be applied to the initial margin requirement. For this strategy, time decay is your friend. You want the price of the option you sold to approach zero. That means if short put option graph choose to close your position prior to expiration, it will be less expensive to buy it back.
After the strategy is established, you want implied volatility to decrease. That will decrease the price of the option you sold, so if you choose to close short put option graph position prior to expiration it will be less expensive to do so.
Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you short put option graph trading options. Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve short put option graph risksand may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies.
Implied volatility represents the consensus of the marketplace as to the future level short put option graph stock price volatility short put option graph the probability of reaching a specific price point. The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract.
There is no guarantee that the forecasts of implied volatility or the Greeks will be correct. Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. System response and access times may vary due to market conditions, system performance, and other factors.
Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in short put option graph, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future short put option graph.
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The Options Playbook Featuring short put option graph options strategies for bulls, bears, rookies, all-stars and everyone in between. The Strategy Selling the put obligates you to buy stock at strike price A if the option is assigned. The Setup Sell a put, strike price A Keep enough cash on hand to buy the stock if the put is assigned Generally, the stock price will be above strike A.
Break-even at Expiration Strike A minus the premium received for the put. The Sweet Spot You want the stock price to be just below strike A at expiration. Maximum Potential Profit Potential profit is limited to the premium received from selling the put. Maximum Potential Loss Potential loss is substantial, but limited to the strike price if the stock goes to zero. Ally Invest Margin Requirement You must have enough cash to cover the cost of purchasing the stock at the strike price. As Time Goes By For this strategy, time decay is your friend.
Implied Volatility After the strategy is established, you want implied volatility to decrease. The idea is to hold the stock longer-term, so you need to be comfortable with that. This graph shows profit and loss of long stock and the short put.