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Short Naked Put

Analyzing the risk profile of a short naked put

Risk Profile & Summary

Standard Setup

We typically establish short puts by selling either
or
This placement gives this strategy a high
Risk Profile: 50 Delta Short Put

How It Works

Short
puts are a
strategy. They profit fastest when the share price rises, and stays above the
price. They have limited profit potential, the most you can make being the amount you sold them for. Their risk is limited only by the value of the shares, $0 being the point of maximum loss. Like all options, short puts have a limited life span. If the share price
below the strike, your put(s) will be
and you will be obligated to purchase 100 shares/put at the strike price. If the share price expires above the strike, the put(s) will be worthless, and you will not be assigned any shares. Either way, you keep the credit received for the original sale of the put.

Why We Do This

Short naked puts are one of the most powerful strategies we have at our disposal. It is common for traders to use short puts as a way to establish a
position. Let's say you'd like to buy XYZ shares if their value falls $5 lower. You can sell a put with a strike $5 below current market value for a credit. If the put expires ITM, you'll be assigned the shares at the price you wanted, plus you'll get to keep the credit you received for the put. If the shares are not below your desired price at expiration, you will not buy any, and you will still keep the credit received. You can then establish a new short put for even more credit, and an attempt to get
in the next cycle.
Short puts offer traders an excellent way to generate positive delta, with a high probability of success. They can be a great way to capitalize on contracting volatility levels, as well as the passage of time.

Summary

Assumption Neutral to bullish
A short put profits most if the share value rises. It can, however, still turn a profit if the share price stays the same or slightly decreases (as long as the break even is not breached).
Cost Basis Credit
The cost basis for a short put is equal to the total credit received.
POP High
A short put typically has a higher than 50% probability of profit.
put can reach 75% POP and higher.
Capital Requirement Low to Moderate
In a
short puts generally require less capital than long shares. The more expensive or volatile the
and the higher the put's
the more capital will be required.
Break Even (before commission and fees) The break-even for a short put is calculated by subtracting the credit received from the strike price. The lower the b/e, the higher the POP.

B/E = Strike - Credit
Maximum Profit Credit Received
The most you can make on a short put is the amount you sell it for.

Max Profit = Credit × 100
Maximum Loss Limited
A short put's maximum loss is calculated by subtracting the credit received from the strike price, and multiplying by 100.

Max Loss = (Strike - Credit) × 100
Capital Allocation (per position) 3-5% Max
Depending on account size, 3-5% of
is the maximum amount of
I would allocate to a naked put position.
Profit Target 50%
The goal is to cash out early with around 50% of the maximum profit.
Delta (P/L rate of change) Dynamic, Positive
Short puts carry dynamic, positive delta. This means they are a bullish strategy with fluctuating delta. Delta increases to 100 as the share price falls, and decreases to 0 as the share price rises.
Theta (Time decay) Positive
Short puts have a positive theta which means they profit off the passage of time.
Vega (Implied volatility sensitivity) Negative
Short puts carry negative vega. This means they benefit from decreases in
and are disadvantaged by increases.
Gamma (P/L Momentum) Negative
Short puts carry negative gamma which means their delta decreases as the share price rises. In practical terms, the position slows into profit and accelerates into loss.

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