How Short Put Works: Earning Premiums with Options
Back in 1993, Coca-Cola's stock dropped to $40. While most investors were waiting for even lower prices, Warren Buffett made a trade that earned him $7.5 million*.
Buffett thought Coca-Cola—a strong company—wouldn't fall below $35. And if it did? Well, $35 was still a great price to buy*.
So he sold put options with a $35 strike price, collecting $1.50 per share in premium*.
When the stock stayed above $35, he kept the entire $7.5 million*.
Source: *Berkshire Hathaway's 1993 Annual Report confirms the company's use of put option strategies during this period, though specific Coca-Cola trade details remain undisclosed per company policy.
That’s the power of the Short Put strategy.
Don't let the fancy name fool you. it's actually simple.
When you're bullish on a stock and believe it won't fall below a certain price, you can sell put options at that price to collect premium. This price is known as the strike price of the option.
If the stock stays above your strike price, you keep the money.
If it falls below, you buy the stock at your chosen price, but your actual cost is lower because of the premium you collected.
Let's take Tesla as an example.
At $309 per share, if you think it won't drop below $275 soon, you could sell $275 strike puts for, say, $3.40 per share. That's $340 per contract.
After 14 days,
If Tesla stays above $275, you keep the $340.
If it drops below, you buy at $275, but your real cost is $271.60 after the premium.
Before using this strategy, make sure of two things: first, that your strike price is unlikely to be reached, and second, that you'd be happy owning the stock at that price if needed.
Some might ask, why not just buy the stock?
The difference is that with Short Put, you make smaller but more consistent profits when the stock does well, while getting to buy at a discount if it falls. It's a more conservative approach.
Building a short put strategy is simple on moomoo.
Go to the options chain, select put option, pick your expiration and strike price, choose "Sell".
Once you've set this up, check the P&L Analysis to see your max profit and breakeven point.
The "max loss" shown assumes the stock drops to zero—which is extremely unlikely—so don’t let that scare you!
Before placing your trade, you can also check the theoretical price from the "Price calculator" and compare it with the live bid/ask prices to help set your selling price.
Finally, tap Trade, enter your price and contract size, then confirm the Sell order.
To wrap up, Short Put can be a great way to generate income when used carefully. But markets are unpredictable, so always manage your risk.
If you're unsure, practice first with Option paper trading—zero risk, all the learning!
This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. Read more
