Short put

A short put is created when an investor sells (writes) a put option. In exchange for collecting the premium up front, the writer accepts an obligation: if the put's owner exercises, the writer must buy the underlying stock at the strike price, no matter how far the market price has fallen.

The position's numbers are straightforward. Maximum gain is the premium received — the best outcome is the put expiring worthless. Breakeven is the strike price minus the premium. Maximum loss equals the strike price minus the premium, multiplied by 100 shares per contract, which occurs if the stock falls to zero. For example, selling a $50 put for a $3 premium produces a maximum gain of $300, a breakeven of $47, and a maximum loss of $4,700 per contract.

Short puts are bullish to neutral strategies. The writer profits when the stock stays at or above the strike, letting the option expire unexercised. Some investors also sell puts as a way to acquire stock at an effective discount: if assigned, their net cost is the strike price minus the premium collected.

The trade-off is asymmetric risk — a small, capped gain against a large potential loss. Options questions are a major scoring area on the Series 7 and Series 9 exams and appear on the SIE as well, so know the short put's maximum gain, maximum loss, breakeven, and market sentiment cold.