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What is a short put?

A short put is an options trading strategy in which an investor sells (writes) a put option with the intention of profiting from a bullish or neutral market outlook. When employing a short put strategy, the trader collects a premium upfront but assumes the obligation to buy the underlying asset at a predetermined strike price if the option is exercised by the buyer.

Selling a put option involves receiving a premium from the option buyer in exchange for granting them the right to sell the underlying asset at the specified strike price within a defined time frame. The seller of the put option anticipates that the underlying asset’s price will either rise or remain stable above the strike price until the option expires. If the option expires worthless (out of the money), the seller retains the premium collected as profit.

However, if the underlying asset’s price falls below the strike price and the put option is exercised by the buyer, the seller is obligated to purchase the asset at the predetermined strike price. The maximum potential loss for the seller of a short put is significant and occurs if the asset’s price declines substantially, resulting in the forced purchase of the asset at a price higher than the current market value. Short puts are used by traders to generate income and manage risk in their portfolios.

To know what is a long put click here. What is long put?