Short Put
Candlefocus EditorTo enter into a short put, the writer must first sell the put option. This can be done through a broker who will find a buyer for the option. The writer collects the option price (premium) at the time of sale and must report it to the tax authorities as a capital gain.
The writer profits if the stock price remains above the strike price at expiration, as they keep the premium they received when they sold the option. If the stock price falls below the strike price of the option at expiration, they incur a loss. They must close out the position by buying back the option, usually at a loss, in order to offset the initial premium they received. They have no further obligation after the option expires.
For those investors seeking a bit of downside protection for a stock position, the short put can be a profitable option strategy. The premium collected from the sale provides the investor with additional income, offsetting any losses in the stock position. However, it is important to understand the risks associated with short puts, as short put writers could incur a large loss if the stock price drops significantly since they will be forced to buy back the option at a loss.