Options Trading Strategies: Short Put
Selling a put option gives you the right and the obligation to purchase the underlying asset at the strike price on expiration. A naked put means that a put writer does not have the necessary funds to purchase the underlying security if the option is exercised. Otherwise, a short put is “cash-secured”.
When to use this strategy?
If you are bullish, you want to buy BTC/ETH cheaper, or to collect a premium if a contact is not exercised. Traders who sell cash-secured puts generally want to purchase BTC/ETH, but they hope that the contract will be exercised, and in that case they could purchase assets at a lower price than the current market price.
Below is a Profit and Loss chart example of a short put options strategy:
Pros:
If you plan to buy the underlying asset at a lower price, a good Out of The Money selection of a strike price makes short put an alternative way of buying BTC/ETH at a cheaper price, and you have also profited by receiving a premium by selling a put.
Cons:
The maximum gain is limited to the premium you have received when you sold the put, but the potential loss is unlimited so it is advisable to use short puts mostly if you want to buy an underlying asset.
Example:
In this example, BTC is trading at 42,410.33 USD, and you expect its price to rise. You have sold a put with a strike price of 40,000.00 USD, an expiration date of February 18th 2022, and for a premium of 851.95 USD.
Profit and Loss chart is given below:
Upon expiration:
If the price of BTC is above the strike price, the option will expire worthless and you are keeping the premium.
If the price of BTC falls below the strike price, you are starting to make losses.
| BTC at Expiry (USD) | Payoff (USD) |
|---|---|
| 36,973.00 | -2,175.05 |
| 37,661.00 | -1,487.05 |
| 38,385.00 | -763.05 |
| 38,969.00 | -179.05 |
| 39,148.05 (break even) | 0 |
| 39,278.00 | +129.95 |
| 39,549.00 | +400.95 |
| 39,875.00 | +726.95 |
| 40,000.00 (strike price) | +851.95 |