Short put, selling put options

Positions - Financial performance short put
Options Investing E-learning

Sellers of put options take on the obligation to buy the underlying value at the exercise price, if assigned to do so. In return, they receive the option premium.

Possibilities
The main objective of investors who sell put options is to receive the option premium. A consequence of this is that the investor has to accept the risk of having to buy the underlying value at the strike price. If the price of the underlying value rises above the strike price, the option may expire without being exercised and the seller will retain the premium. As long as the option has not been exercised, the seller can liquidate the option position with a closing buy transaction on the derivatives market. However, if the market price of the underlying value drops below the strike price, the put option may be exercised. The seller will then be required to buy the underlying value at a price that is higher than the current market price. In addition to making a profit on option premiums, the investor may also consider selling put options as a means of fixing a purchase price for the underlying value. The purchase price is then equal to the strike price, less the option premium, plus costs. If the option is not exercised, the underlying value will not be delivered and the investor will keep the profit earned on the option.

Risk
The seller of a put option accepts the risk of having to buy the underlying value at a price that is substantially higher than the current market price. A sold put option is always naked. The investor must therefore have the financial means to pay for the underlying value in the event that the option is exercised, and hence has to provide the margin. Sellers of put options who expect to have to take delivery of the underlying value because of a fall in its price can avoid doing so by concluding a closing buy transaction on the derivatives market before being assigned.