Short Puts

A Put writer is an investor who sells a Put that he or she doesn’t already own.

Since the buyer of a Put has the right to sell XYZ stock at the strike price, the writer of a Put is obligated to buy XYZ stock at the strike price if assigned.

As with uncovered Calls, the risks of writing uncovered Put options are substantial. Thus, the Put writer must be financially capable of buying XYZ if assigned an exercise notice at any time during the life of the option.

Opinion: Bullish.

Example: Short 1 XYZ Oct 60 Puts.

Description: The investor writing Put options should believe that XYZ is not going down! XYZ doesn’t have to go up, but it must definitely should not go down.

The maximum profit is limited to the Put premium received and is achieved when the price of XYZ is at or above the option’s strike price at expiration. The maximum loss is unlimited.

Writing Puts: Why?

Like uncovered Call writing, uncovered Put writing has limited rewards (the premium received) and potentially substantial risk (If XYZ falls below the strike price and the writer is assigned).

There is a small group of investors whose only goal in writing uncovered options, Calls and/or Puts, is to collect and keep the option’s premium.

As Call writers, they have no interest in selling XYZ stock. As Put writers, they have no interest in buying XYZ.

Although both outcomes are possible, these writers simply want time to pass and their written options to decay quickly and without many surprises.

“Jack be nimble, Jack be quick…”

It must be pointed out that this group is small not because of any lack of interested candidates, but because of a lack of successful candidates. It could be said, “While many are called, few remain!”

This type of option writer is offered limited rewards and unlimited risk.

Thus, unless you have good market timing, adequate finances, the time needed to constantly monitor XYZ and are very nimble, don’t join this group.

Writers Seeking Stock:

An option writer, if assigned, is obligated to either sell XYZ at the strike price (Call writer) or buy XYZ at the strike price (Put writer).

The investor should never write a Put on a stock that he or she would be uncomfortable owning!

Also, it is important that the number of Puts written corresponds to the number of shares that the investor is both comfortable and financially capable of owning! To do otherwise, is rampant speculation.

Remember, the investor who is financially prepared to purchase XYZ is not speculating. The assignment obligating the investor to buy the stock may not be the primary goal, but it should not be a disaster if it were to occur.