Do you know what a short put is in options trading? Short puts are the same as selling a naked put option, just a different name. You go short or sell a put when you believe that the price of the stock is going up. This is a very risky strategy because the risk on selling naked is high.
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What Is a Short Put?
The short put is another name for put selling. Calls and puts are the foundation of options trading. They make up all options strategies. Options trading has become popular because of the ability to make money in any market. Even when the market is trading sideways, you don’t have to sit on the sidelines.
Buying puts are the most common and basic options strategy. However, do you know about the short put?
It may sound like shorting and put options together. However, it has a much different outcome. It’s like shorting in that you’re selling a position.
However, a short put bias is much different than short selling or buying puts. Options trading has long seemed overwhelming to new traders.
There are many more moving parts to an options success than a stocks. However, that makes options more profitable along with the ability for larger loss.
As a result, options take time and dedication to learn. Once you learn them however, you have a great skill that allows you to grow a small account trading the expensive stocks.
What Are Options?
If you’re going to trade the short put strategy, you need to understand what options are. An options gives you the right but not the obligation to buy (call) or sell (put) a stock at a certain price within a certain time.
One contract controls 100 shares. Hence their appeal when growing a small account. You don’t own the shares outright. As a result, you’re not paying the money to own the shares.
For example, you want to trade Apple but owning 100 shares at $185 a share would cost $18,500. Most new traders don’t have that kind of money.
The options contract is only $2.50 per contract. Multiply that by 100 and you’re only paying $250. See the price difference?
Hence the appeal of options trading. However, it’s important to remember the moving parts that make up an options profit and loss.
Long vs the Short Put
Long vs short provides a much different outcome. As a result, it’s important to know the difference between the two.
When you’re going long, you’re bullish on the trade. That doesn’t mean you’re taking a long term position however. Since options are wasting assets, holding long term may not be in your trading plan.
When trading the short put strategy however, you’re still bullish on the trade. That may seem like an oxymoron. How can you be bullish on a put trade? Aren’t outs bearish?
The answer is yes. However, the short put is, in essence, selling a put. As a result, you’re wanting the stock to go up. That thought process may take some time getting used to.
Everything we’re taught about longing vs shorting goes out the window when selling a short put. Longing vs a short put is, in fact, wanting the same outcome.
You’re just going about it a different way. Hence why our trading service encourages practice trading. Options open up a whole new way to trade.
How to Know When to Sell a Put?
A short put is, in essence, is selling a put to someone. When looking at the charts how would you know when to place that trade? New traders know the basic concept of the put being bearish. However, a short put, aka selling a put, is actually a bullish strategy. Selling options seem to accrue much more risk than buying. However, it looks that way because selling options actually has a higher success rate.
The majority of options expire worthless. Hence, the seller ends up collecting the premium. In fact, time decay works for them rather than against them. As a result, if you see bullish patterns on charts, instead of buying a call, try selling a put. It may seem counter intuitive to be trading puts on bullish patterns however, that’s the short put strategy.
Risk management is important no matter what trading style you use. As a result, you protect yourself. No strategy is without risk.
Hence why risk management is super important. Especially with the short put strategy. In theory, selling a put has overwhelming risk.
That would be the same as shorting. The stock can go up forever causing you to lose quite a bit. In theory, selling a put can also have quite a bit of risk.
However, risk management protects you. You’re planning your trades and that’s incredibly important. If you get into a trade without having an exit plan, you’re going in blind.
You need to have a max loss and a profit target. As a result, if your trade goes against you, you have a limit of what you’re willing to lose.
When implementing the short put strategy, your profit is already predetermined. In fact, you’re collecting the premium of the trade.
In other words, you get what the person paid to buy the put from you. The more time passes, the more time decay you receive.
If you’ve followed along within the Bullish Bears trading rooms or our community then you know how much we promote practice trading.
We use ThinkorSwim by TD Ameritrade to practice trading the short put strategy. It’s always a good thing to practice before going live. As a result, you can practice entries and exits among other things.
Support and resistance along with candlesticks and patterns are imperative to trading. When practicing, you can learn how to use all of these tools for your benefit.
As a result, you’re working out the kinks without using real money. You can see how the short put strategy works. That’s a good thing since this can be a risky strategy.
If you need more help, take our options trading course.