Option Strategies Utilized
in the Short Put Portfolio
Short Put
A short put is simply the sale of a put option. The buyer of a short put option has the right, but not the obligation, to sell shares of stock back to the seller at a given price ("strike price"). The seller of a short put is provided with premium income from the option buyer and may profit in flat to rising markets. This strategy is generally used when the option seller expects the share price to remain steady or increase slightly over the life of the option, in which the option would expire worthless. This is considered a bullish strategy. The maximum profit the investor can make is the premium received from selling the option. The maximum loss that the investor can incur from selling an uncovered short put ("naked put") is unlimited in a falling market. Selling a naked put refers to selling a put option without owning the underlying stock.
Short Straddle
A short straddle is a combination of writing uncovered calls (bearish) and writing uncovered puts (bullish) of the same underlying security, strike price and expiration date. Together, they produce a position which is considered neutral. An investor would utilize this strategy when he or she expects the underlying stock to stay within a narrow range. The investor is considered to be taking a position on the "volatility" of the underlying security. The profit is limited to the premiums received from the put and call. The maximum loss that the investor can incur from selling a short straddle is unlimited in both a rising and falling market, as the price of the underlying stock may move far beyond the strike prices of the call or put.
Credit Put Spread
A credit put spread ("bull put spread") is created by purchasing one put option while simultaneously selling another put option with a higher strike price of the same underlying security. This type of strategy is known as a credit spread because the premium received by selling the put option with a higher strike price is greater than the cost of purchasing the put with the lower strike price. An investor would utilize this strategy when he or she expects a moderate rise in the price of the underlying stock. Regardless of how the price of the underlying stock moves, the maximum loss is limited to the difference between the two strike prices (minus the net credit received from the difference of the option premiums). The maximum profit an investor can make is equal to the difference between the premium received from the short put and the premium paid for the long put (the "net credit").
*Options are not suitable for all investors. These investments can be volatile and investors may lose their entire original investment. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your Financial Advisor, by calling 1-888-OPTIONS or online at www.optionsclearing.com/publications.
