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Optionsintermediate

Short Put

A short put is written by selling a put option. The writer collects premium PP upfront and accepts the obligation to buy the underlying at strike KK if the holder exercises. Maximum profit equals PP, reached when ST≥KS_T \geq K. Maximum loss equals K−PK - P, reached if the stock falls to zero. Unlike a naked short call, the downside is bounded because share prices cannot go below zero. The view is bullish to neutral, often used to buy stock at a target price while earning income.

Why it matters

Writing a put is getting paid to set a buy limit. The writer is essentially saying "I am happy to own this stock at KK if it falls. Pay me PP now for that commitment." If the stock stays above KK, the writer keeps the premium and never buys anything. If the stock falls, the writer is assigned and ends up long at an effective cost of K−PK - P. The risk is that the assignment happens after a sharp drop, leaving the writer with a paper loss on the stock immediately.

Formulas

Profit at expiry
Profit=P−max⁡(K−ST,0)\text{Profit} = P - \max(K - S_T, 0)
Profit =P= P for ST≥KS_T \geq K. Loss grows linearly as STS_T falls below KK. Bounded below at −(K−P)-(K - P) when ST=0S_T = 0.
Break-even at expiry
ST∗=K−PS_T^* = K - P
Same level as the matching long put break-even, viewed from the writer's side.

Worked examples

Scenario

Write a 1-month put on Wesfarmers with K=K = 55$ at premium P=P = 1$. At expiry ST=S_T = 58$.

Solution

Payoff =−max⁡(55−58,0)== -\max(55 - 58, 0) = 0$. Profit =1−0== 1 - 0 = 1$ per share. The put expired OTM, the writer keeps the full premium, and no shares change hands. On one ASX contract of 100 shares, that is $100 of income.

Scenario

Same trade, but Wesfarmers falls to ST=S_T = 40$ after a profit warning.

Solution

Payoff =−max⁡(55−40,0)=−= -\max(55 - 40, 0) = -15$. Profit =1−15=−= 1 - 15 = -14$ per share. The writer is assigned and ends up long at an effective cost of K−P=K - P = 54,againstamarketpriceof, against a market price of 40. The loss of $14 per share is real but bounded. The worst case would be the share going to zero, capping the loss at $54 per share.

Common mistakes

  • ✗Short puts have unlimited risk like naked calls. Maximum loss is bounded at K−PK - P because a stock cannot fall below zero. Risk is large but finite.
  • ✗Writing puts is a free way to earn yield. The writer is taking equity risk equivalent to a long stock position with capped upside. In a sustained bear market, repeated short puts can compound losses just like a long-only portfolio.
  • ✗A cash-secured short put is the same as a naked short put. Cash-secured means the cash to honour the strike is set aside, which removes funding risk but does not change the economic loss profile.

Revision bullets

  • •Sell a put to collect premium PP
  • •Max gain =P= P when ST≥KS_T \geq K
  • •Max loss =K−P= K - P (only if ST=0S_T = 0)
  • •Bullish to neutral view, bounded downside
  • •Often used as a paid buy limit order

Quick check

Writing a put obligates the writer to:

Write a put with K=K = 40$ for P=P = 3$. The stock falls to ST=S_T = 35$. Profit per share is:

Connected topics

Long PutShort StraddleSynth. Stock

In learning paths

Options Path

Sources

  1. Hull (2022), §10.4, §12.1
    Hull, John C. Options, Futures, and Other Derivatives. 11th ed. Pearson, 2022. ISBN 978-0-13-693997-9.
    Standard textbook treatment of the short put position, profit profile, and the assignment mechanism.
  2. McMillan (2012), Ch. 6
    McMillan, Lawrence G. Options as a Strategic Investment. 5th ed. Prentice Hall Press, 2012. ISBN 978-0-7352-0466-2.
    Strategy reference on naked and cash-secured short put writing, with explicit profit and loss profile and use as a paid buy limit.
  3. OIC Short Put Strategy
    Options Industry Council. Strategy Guide: Cash-Secured Put. Options Education, accessed 2026.
    Industry strategy guide explaining the cash-secured short put, profit and loss diagram, and bounded maximum loss.
  4. ASX Clear Margin Rules
    ASX Clear. Margin Methodology for Equity Options. ASX, accessed 2026.
    Local reference on initial and variation margin for written put positions on ASX-listed equities.
How to cite this page
Dr. Phil's Quant Lab. (2026). Short Put. Derivatives Atlas. https://phucnguyenvan.com/concept/short-put
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