What is a Short Put?
In a put option transaction, there must be one option seller and one option buyer.
For the option buyer
, they have the right to sell the underlying asset at an agreed strike price on or before the expiration date.
For the option seller
, they are obligated to buy the underlying asset.
Suppose you are an option seller:
and you sell a put option that tracks TUTU stock with a strike price of $90 and an expiration date of March 1, collecting a premium of $5 per share.
You sell this put because you believe that the TUTU stock price will not fall below $90 by March 1.
Since you think the stock price will not fall below $90, you predict that the option buyer is unlikely to exercise this right, thus you won’t need to fulfill your obligation to buy the stock, allowing you to easily earn the $5 per share you collected earlier.
As the option seller, you believe the odds are in your favor, so you choose to sell this put.
In this transaction, you and the option buyer are counterparties:
Option Seller(Option Writer):
You receive $500 (at $5 per share for 100 shares) from the counterparty and must fulfill the corresponding obligation.
This means that any day before or on March 1, when the counterparty wishes to exercise the option, you must buy 100 shares of TUTU stock from them at a price of $90 per share, without the ability to refuse.
Of course, regardless of whether the buyer exercises this right, the premium you received earlier does not need to be refunded.
Option Buyer (Option Holder):
The buyer pays $500($5 × 100) to purchase a right, allowing them to sell 100 shares at $90 on any day before or on March 1.
The buyer can exercise this right or not, but the previously paid $500 is non-refundable.
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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
