With a short put position (see figure 2), you take in some premium in exchange for taking on the responsibility of potentially buying the underlying security at the strike price. There are two main reasons you might employ a short put strategy: to potentially buy the stock at a lower price and to collect options premiums. And although the stock could drop considerably before you decide to sell, the risk is technically limited because a stock’s price cannot drop below zero. With a short put options position, you accept the obligation to buy the stock at a set price when the market price of the stock will likely be lower and could continue to fall. The seller receives a premium for selling the call in exchange for potentially unlimited downside risk as the stock price increases.
However, if you don’t own the underlying stock, then the risk of loss is unlimited because there’s no limit to how much higher the stock can rise before you may have to buy it back.įIGURE 1: SHORT CALL OPTION RISK GRAPH. In the case of a short call options position (see figure 1), you incur the obligation to sell the stock at a set price. Selling or “shorting” options obligates you to either buy or sell the underlying security at any time up until the option expires or until the option is bought back to close. However, selling a call is usually a bearish strategy and selling a put is usually a bullish strategy. Generally, you buy a call if you’re bullish and buy a put if you’re bearish. Naked options strategies involve the highest amount of risk and are only appropriate for traders with the highest risk tolerance. Certain requirements must be met to trade options through TD Ameritrade.
Please note that options trading involves significant risks and is not suitable for everyone. Here’s a little background on what you need to know before you start selling options. Of course, selling options comes with significant risks too. Instead of buying a call or put option, you can sell them, which means that instead of paying the premium, you can collect the premium, and instead of time value working against you, it can work for you. With every transaction, there’s a buyer and a seller, which is true for options trading too. The Option Hacker tool on the thinkorswim ® platform can help when searching for short options candidates.When considering options trading, it’s important to understand the impact of dividends on options prices.When selling an option short, traders incur the obligation to either buy or sell the underlying security at any time up until the option expires.
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