Do you know what a short put is in options trading? Short puts are the same as selling a naked put option, just a different name. You go short or sell a put when you believe the stock price is increasing. This is a very risky strategy because the risk of selling naked is high.
The short put is another name for put selling. Calls and puts are the foundation of options trading. They make up all options strategies. Options trading has become popular because of the ability to make money in any market. You don’t have to sit on the sidelines even when the market trades sideways.
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Buying puts are the most common and basic options strategy. However, do you know about the shortcut? It may sound like shorting and putting options together. However, it has a much different outcome. It’s like shorting in that you’re selling a position.
However, a short put bias differs greatly from short selling or buying puts. Options trading has long seemed overwhelming to new traders.
There are many more moving parts to an option’s success than a stock. However, that makes options more profitable and allows larger losses.
As a result, options take time and dedication to learn. Once you learn them, however, you have a great skill that allows you to grow a small account trading expensive stocks.
What Are Options?
If you trade the short put strategy, you must understand the options. An option gives you the right but not the obligation to buy (call) or sell (put) a stock at a certain price within a certain time.
One contract controls 100 shares. Hence, they are appealing when growing a small account. You don’t own the shares outright. As a result, you’re not paying the money to own the shares.
For example, you want to trade Apple, but owning 100 shares at $185 a share would cost $18,500. Most new traders don’t have that kind of money.
The options contract is only $2.50 per contract. Multiply that by 100, and you’re only paying $250. See the price difference?
Hence, the appeal of options trading. However, it’s important to remember the moving parts that make up an option’s profit and loss.
Long vs the Short Put
Long vs short provides a much different outcome. As a result, it’s important to know the difference between the two.
When you’re going long, you’re bullish on the trade. That doesn’t mean you’re taking a long-term position, however. Since options are wasting assets, long-term holding may not be in your trading plan.
However, you’re still bullish on the trade when trading the short put strategy. That may seem like an oxymoron. How can you be bullish on a put trade? Aren’t outs bearish?
The answer is yes. However, the short put is, in essence, selling a put. As a result, you want the stock to go up. That thought process may take some time to get used to.
Everything we’re taught about longing vs shorting goes out the window when selling a short put. Longing vs a short put is wanting the same outcome.
You’re just going about it a different way. Hence, our trading service encourages the practice of trading. Options open up a whole new way to trade.
When to Sell a Put
In essence, a short put is selling a put to someone. When looking at the charts, how would you know when to place that trade? New traders know the basic concept of the put being bearish. However, a short put, a.k .a. selling a put, is a bullish strategy. Selling options seem to accrue much more risk than buying. However, it looks that way because selling options has a higher success rate.
The majority of options expire worthless. Hence, the seller ends up collecting the premium. Time decay works for them rather than against them. As a result, if you see bullish patterns on charts, try selling a put instead of buying a call. It may seem counterintuitive to be trading puts on bullish patterns. However, that’s the short-term strategy.
Risk Management
Risk management is important no matter what trading style you use. As a result, you protect yourself. No strategy is without risk.
Hence why risk management is super important. Especially with the SP strategy. In theory, selling a put has overwhelming risk.
That would be the same as shorting. The stock can go up forever, causing you to lose quite a bit. In theory, selling a put can also have quite a bit of risk.
However, risk management protects you. You’re planning your trades, and that’s incredibly important. If you get into a trade without an exit plan, you’re going blind.
It would be best to have a maximum loss and a profit target. As a result, if your trade goes against you, you have a limit on what you’re willing to lose.
When implementing the short put strategy, your profit is already predetermined. You’re collecting the premium of the trade.
In other words, you get what the person paid to buy the put from you. The more time passes, the more time decay you receive.
Final Thoughts
If you’ve followed along within the Bullish Bears trading rooms or our community, you know how much we promote practice trading.
We use ThinkorSwim by TD Ameritrade to practice trading the short put strategy. It’s always a good thing to practice before going live. As a result, you can practice entries and exits, among other things.
Support, resistance, and candlesticks and patterns are imperative to trading. When practicing, you can learn how to use all of these tools for your benefit.
As a result, you’re working out the kinks without using real money. You can see how the shortcut strategy works. That’s a good thing since this can be a risky strategy.
If you need more help, take our options trading course.
Frequently Asked Questions
The investor believes that the underlying stock with decrease with a long put. When purchasing a short put the investor believes that the price of the stock underlying stock will increase.
Investors trade a short put because they collect a premium if the price of the underlying security increases without the option being exercised.
The short put is a a bullish options strategy. Traders implement this strategy when they believe that a stock is going to go up in value.
