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What is a Short Put?

 

Summary description: The seller of a put sells to the buyer the right to sell a certain quantity of the underlying instrument (a share, for example) at a certain price. In other words: The seller of the put is obliged to accept delivery of the underlying instrument at the put buyer´s request.
Price expectation: constant or slightly increasing prices and decreasing price fluctuations
Profit potential: premium received
Loss potential: almost unlimited (theoretically limited to the share price dropping to zero, minus the premium received)

 

Both the seller of the put and the seller of the call benefit, because options become cheaper when price fluctuations decrease and the seller is able to buy back the options at a lower price upon closing out. For more details please refer to the chapters on option pricing.

Example:

Sale of a put on a share with an exercise price of EUR 100 at a price of EUR 3.

When the option expires, profit and loss will be incurred as a result of the following different share prices:

Share price upon expiration of the option Profit and loss on the short put
120 +3 (received premium)
110 +3 (received premium)
104 +3 (received premium)
100 +3 (received premium)
95 -2 (-5 + 3 received premium)
80 -17 (-20 + 3 received premium)

If prices increase, profits are limited to the premium received of EUR 3. Losses are incurred when prices fall below EUR 97 (break-even point), because the share must be bought at a higher price than the current market price.

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