4/8/23, 6:55 PM Short Put | Naked (Uncovered) Put Strategies - The Options Playbook

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The Options Strategies » Short Put

Short Put
AKA Naked Put; Uncovered Put

The Setup
Sell a put, strike price A
Generally, the stock price will be
above strike A

Who Should Run It

All-Stars only

NOTE: Selling puts as pure speculation,

with no intention of buying the stock, is
The Strategy suited only to the most advanced option
traders. It is not a strategy for the faint
Selling the put obligates you to buy stock at strike price A if the option of heart.
is assigned.
When to Run It
When selling puts with no intention of buying the stock, you want the
puts you sell to expire worthless. This strategy has a low profit
You’re bullish to neutral.
potential if the stock remains above strike A at expiration, but
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substantial potential risk if the stock goes down. The reason some
traders run this strategy is that there is a high probability for success
when selling very out-of-the-money puts. If the market moves against
Break-even at Expiration
you, then you must have a stop-loss plan in place. Keep a watchful eye
on this strategy as it unfolds. Strike A minus the premium received for
the put.
Options Guy's Tips
The Sweet Spot
There’s a large sweet spot. As long as
You may wish to consider ensuring that strike A is around one the stock price is at or above strike A at
standard deviation out-of-the-money at initiation. That will increase expiration, you make your maximum
your probability of success. However, the lower the strike price, the profit. That’s why this strategy is
lower the premium received from this strategy. enticing to some traders.

Some investors may wish to run this strategy using index options
rather than options on individual stocks. That’s because historically,
Maximum Potential
indexes have not been as volatile as individual stocks. Fluctuations in Profit
an index’s component stock prices tend to cancel one another out,
lessening the volatility of the index as a whole. Potential profit is limited to the
premium received for selling the put.

Maximum Potential Loss

Potential loss is substantial, but limited
to the strike price minus the premium
received if the stock goes to zero.

Ally Invest Margin

Requirement
Margin requirement is the greater of the
following:

25% of the underlying security

value minus the out-of-the-money
amount (if any), plus the premium
received
OR 10% of the underlying
security value plus the premium
received

NOTE: The premium received from

establishing the short put may be
applied to the initial margin
requirement.

After this position is established, an

ongoing maintenance margin
requirement may apply. That means
depending on how the underlying
performs, an increase (or decrease) in
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the required margin is possible. Keep in

mind this requirement is subject to
change and is on a per-contract basis. So
don’t forget to multiply by the total
number of contracts when you’re doing
the math.

As Time Goes By
For this strategy, time decay is your
friend. You want the price of the option
you sold to approach zero. That means if
you choose to close your position prior
to expiration, it will be less expensive to
buy it back.

Implied Volatility
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 your
position prior to expiration it will be less
expensive to do so.

Check your strategy with Ally Invest tools

Use the Profit + Loss Calculator to establish break-even points, evaluate how your strategy might
change as expiration approaches, and analyze the Option Greeks.
Use the Probability Calculator to verify that the put you sell is about one standard deviation out-of-the-
money.
Use the Technical Analysis Tool to look for bullish indicators.

Don’t have an Ally Invest account? Open one today!

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