Options Strategies

Workshop: Short Put

Verticals
Leonard Eng & Liew Wan Ting
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Short Put Verticals
Goals for this Section

▪ Understand the risk profile of put verticals;

▪ Learn all possible outcomes of the trade;

▪ Practice placing short put vertical paper trades

Options involve unique risks and are not suitable for all investors

The examples that follow do not include transactions costs. Transaction costs (commissions and other fees) are important factors and
should be considered when evaluating any options trade.

Spreads and other multiple-leg option strategies can entail substantial transaction costs, including multiple commissions which may
impact any potential return

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Objectives
To potentially profit from sideways-trending and uptrending stocks or ETFs by selling
a put option at one strike to capture time decay and also buying a put option at a lower
strike to limit risk.

SELL BUY

Option
+ Option =
SHORT PUT LONG PUT SHORT PUT VERTICAL

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Risk Profile
MAX LOSS BREAK-EVEN POINT MAX GAIN

Max Gain
Net credit (difference between two
premiums)

Max Loss

PROFIT / LOSS
(Short strike – Long strike) – Net credit

Break-Even Point
Short strike – Net credit

SHARE PRICE

Short Put Vertical Risk Profile

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Example

▪ XYZ is trading at $50 per share

SHORT
▪ You sell the 48 strike put option PUT
for a premium of $2.25
LONG
PUT
▪ You buy the 46 strike put for
$1.25

▪ You collect a total premium of

$100 ($1 credit x 100)

Short Put Long Put Net

Credit - Debit = Credit
$2.25 $1.25 $1.00

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What if the stock goes up?
Let’s say the stock closes at $51 at
expiration
Expire
OTM

▪ Both options are OTM; Expire

OTM

▪ Both expire worthless;

▪ The profit is capped at $100 (the
credit received.

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What if the stock goes down a little?

Let’s say the stock falls to $47 at

expiration

▪ The short put is ITM and gets

assigned

▪ The long put is OTM and expires

worthless

▪ You’ll have to buy the stock at

$48, and either hold it or sell back
at whatever price the market
gives you

▪ You still keep the $100 credit

from selling the spread
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What if the stock goes down a lot?

Let’s say the stock falls to $45 at

expiration

▪ The short put is ITM and gets

assigned

▪ The long put is ITM and is

automatically excercised

▪ Your total loss is $100 (distance

between the spread minus the
net credit).

Distance between Net credit Loss

the spread per spread per spread
- =
$200 $100 $100
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Common Pitfalls: Short Put Verticals

▪ Traders may fail to realize that if the stock is between the strikes at expiration, they may be
obligated to buy the stock at the strike of the short put. It behaves like a short put strategy.

▪ Traders may fail to understand that the stock may have a lot of fluctuation before possibly
getting to max loss.

▪ Traders may fail to understand that this strategy could be used when the stock has been sold
off down to support – here the volatility is higher, possibly creating higher probabilities and
higher premiums

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Tips For Exiting
Near expiration:
1. If both options are out of the money: EXIT
a) Consider closing the position when the
bid price of the short strike is $0.05 or SHORT PUT
Option PRICE
less. ≤ $0.05

On last trading day before expiration:

1. If only the short strike is in the money:
- Consider buying back the short strike
- Consider letting the long strike expire worthless

2. If both strikes are in the money:

- Consider letting the trade go to assignment/exercise
- Commissions, exercise and assignment fees will impact
potential returns 11