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Selling Short Put Options.

By selling a put option, you are giving an option holder the right to sell an underlying stock or index at a particular strike price. Option sellers have obligations. Buying a put option requires the payment of a premium. The seller of the option gets to keep this premium as a gain if the option expires worthless. A trader who sells put options (also called the put writer) believes the market will rise.

• In order to make money on a short put sale, the price of the underlying security must stay above the put strike at expiration. The maximum profit the put writer can expect to make is limited to the credit received for the sale of the put (the premium).

• Should the price of the security fall below the short put strike at expiration, the put may be assigned to the option holder who may then choose to exercise it. If the put holder decides to exercise the option, the put seller is obligated to buy the underlying stock or index at the strike price.

In a flat to rising market, written puts (the selling short of put options) can provide a trader with extra income. If at expiry the price of the underlying security remains above the strike price of the put option, the put will expire worthless; a put seller will benefit by keeping the entire premium received when the option was sold.

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