Short position in 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.
Short Put Option
The payoff is inverse of long put position , which 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.
Basic Options Charts
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.
If you have seen the explanation of long put option payoff formulas , you will find the short put payoff formulas are exactly the same, only with opposite signs, as 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 Top of this page Home Tutorials Calculators About Contact. The Agreement also includes Privacy Policy and Cookie Policy.
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Short Put Payoff Diagram and Formula This page explains short put option payoff. Short Put Payoff Diagram A short put option position is a bullish strategy with limited upside and limited but usually very high risk.
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 Call Payoff Formulas If you have seen the explanation of long put option payoff formulas , you will find the short put payoff formulas are exactly the same, only with opposite signs, as 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 volatility 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 unlimited , equal to the strike price less 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.
More Short Call Payoff Diagram and Formula Put Option Payoff Diagram and Formula Call Option Payoff Diagram, Formula and Logic Short Straddle Payoff and Breakeven Points.