What is a Short Put? Definition, Payoff, and Example
A short put is an options strategy where a trader sells a put option, collecting premium and obligating the seller to buy the underlying stock at the strike price if assigned.
What is a Short Put?
A short put is an options position created by selling a put option. The seller collects a premium upfront and takes on the obligation to buy 100 shares of the underlying stock at the strike price if the buyer exercises the option. The position profits if the stock stays above the strike price at expiration, and loses money if the stock falls below the strike price. The maximum profit is the premium received. The maximum loss is the strike price minus the premium, multiplied by 100, if the stock goes to zero.
How a Short Put is Calculated
The payoff at expiration for a short put is:
Profit = Premium Received − Max(0, Strike Price − Stock Price at Expiration)
The breakeven price is:
Breakeven = Strike Price − Premium Received
The maximum profit is the premium received, achieved when the stock closes at or above the strike price. The maximum loss occurs at zero stock price: Loss = (Strike Price − Premium) × 100.
Margin requirements apply. A short put in a margin account requires cash or margin equal to the assignment value minus the premium, subject to exchange minimums. The broker calculates the requirement as a percentage of the strike price plus the premium received.
Worked Example: NVDA
NVDA trades at $120.00. A trader sells one put contract with a $115 strike price expiring in 30 days. The premium is $2.50 per share, or $250 total for one contract.
Scenario 1: NVDA closes at $125 at expiration. The put expires worthless. The trader keeps the entire $250 premium. The return on margin is the premium divided by the margin requirement — roughly 2.2% in 30 days.
Scenario 2: NVDA closes at $110 at expiration. The put is in the money by $5. The trader is assigned and buys 100 shares at $115, even though the market price is $110. The trader's net cost is $115 − $2.50 = $112.50 per share. The paper loss is $250 on the stock position, offset by the $250 premium received — net zero.
Scenario 3: NVDA crashes to $80. The trader is assigned at $115. The loss is ($115 − $2.50 − $80) × 100 = $3,250.
When Traders Use a Short Put
The short put is a bullish or neutral strategy. Traders sell puts when they believe the stock will stay above the strike price through expiration. The strategy generates income from the premium without requiring the trader to own the stock.
The short put also serves as a limit order alternative. A trader who wants to buy AAPL at $180 when it trades at $190 can sell a $180 put expiring in 30 days. If the stock drops to $180, the trader is assigned and buys the stock at an effective price of the strike minus the premium. If the stock stays above $180, the trader keeps the premium and can sell another put.
The strategy is the core of the wheel strategy, where a trader sells puts to enter a position, then sells covered calls to generate income while holding the stock.
Limitations and Common Misconceptions
A short put has unlimited downside risk. The stock can fall to zero, and the seller is obligated to buy at the strike price. The maximum loss is large and real. Many traders underestimate this risk during bull markets.
Short puts do not require the trader to hold the position to expiration. The seller can buy back the put at any time to close the position. Buying back at a higher price than the sale price results in a loss. Assignment can occur before expiration, especially for in-the-money puts, so the seller must maintain sufficient cash or margin.
A common misconception is that a short put is equivalent to a cash-secured put. The two are identical in payoff but differ in account treatment. A cash-secured put requires the full cash amount to be set aside. A naked short put uses margin and carries margin call risk.