Uncovered Put Write Explained

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Short Put Overview

Kevin Ott

The short put option strategy is a bullish, neutral, and minimally bearish option trading strategy that has two forms: cash secured and naked.

Selling cash secured puts means that a trader holds enough cash to have the underlying asset “put” to them. Selling naked puts involves trading on margin where the trader doesn’t have available funds to secure the short puts. Therefore, naked (or uncovered) short puts have an inherently high amount of leverage.

The short put option strategy is popular due to the inherent probabilities of options. Options that are far-out-of-the-money have a higher probability of expiring worthless. Many professional investors like Warren Buffett and *unfortunately* Victor Niederhoffer have been big proponents of the short put option strategy. If managed properly, short puts can be a very useful options trading strategy to generate income from theta decay and possibly acquire the underlying asset at lower prices.

Key Points

  • Although the risk is not unlimited, selling puts is highly risky
  • In exchange for the large amount or risk, there is a high probability of profit
  • Most puts expire worthless, so selling expensive puts to fearful investors has yielded consistent profits for many

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Short Put Option Strategy Definition

-Sell (short) 1 put

Note: like most options strategies, you can sell puts in-the-money (ITM), at-the-money (ATM), or out-of-the-money (OTM).

Short Put Example

Stock XYZ is trading at $50 a share.

Sell 48 put for $0.30

Maximum Profit and Loss for the Short Put Option Strategy

Maximum profit for a short put = PREMIUM RECEIVED

Maximum loss for a short put = UNDERLYING ASSET GOES TO ZERO

Although the max loss is indeed limited, losses with short puts can mount rapidly due to expansions in volatility and sell-offs in the underlying.

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In the example above, the max profit is $30 ($0.30 per contract). In this example, the max loss is $4,770.00. This would be the absolute worst-case scenario. Although it’s very rare, stocks occasionally do go to zero.

This is a pretty unfavorable profit-loss ratio. So what’s the catch? Well, in exchange for this high potential loss, short puts have an inherently high probability of deprecating and ultimately expiring out-of-the-money and ending up worthless.

Short Put Summary

Maximum Profit Defined
Maximum Loss Defined but severe
Risk Level High
Best For Creating a long position in a stock and collecting premium
When to Trade When you are bullish or neutral on a stock
Legs 1 leg
Construction sell put option
Opposite Position Long put

The breakeven point for a short put = premium received subtracted from the put option strike price.

In the example at the top of this page, the breakeven point for stock XYZ would be $47.70. In other words, since XYZ is trading at $50, it has to decline $2.30 before the trade becomes unprofitable. It is important to note that this is the break-even point at expiration. Stock XYZ can decline $2.30 at anytime before expiration and the short put will not necessarily break even.

Why Trade Short Puts?

The short put option strategy is a fascinating options trading strategy that is particularly popular among professional investors. Why? Primarily because of the probabilities of options.

Puts that are very far out-of-the-money have a low delta. Therefore, far OTM puts don’t dramatically change in price without dramatic downward moves in the underlying asset. Furthermore, far OTM puts only pay the buyer if the underlying asset declines dramatically prior to expiration. Many investors want (and sometimes need) to have protection against dramatic declines in a particular instrument. Other traders are willing to take this bet and sell these puts.

If the underlying asset doesn’t decline, and/or if volatility contracts, it’s fairly easy to make money selling overpriced puts. Plus, the short put option strategy makes money if the underlying asset stays the same, increases, or minimally decreases. Other traders sell put options not only to collect the premium, but to also potentially acquire the underlying asset at a lower price. This strategy of going long is only possible with cash-secured short puts, not naked.

In the example above, if you wanted to by XYZ stock at $48, even though it is currently trading at $50, we could sell a $48 put for $0.30. If the stock isn’t below $48 at expiration, you keep the $30 in premium. If it is at or below $48 at expiration, you will be put 100 shares of XYZ at $48 and still keep the premium.

Our breakeven for this short put trade is $47.70 because this is the strike price of the short put minus the credit received. This is a common approach among institutions looking to accumulate stock.

Margin Requirements for Selling Puts

Because short puts can be sold both naked and covered, margin requirements for placing the trade will vary. In the example above, to sell 1 covered $48 put of XYZ stock, you would need roughly $4,770 in buying power; this is the max loss for the trade.

For naked short puts, the margin requirement is typically 20% of the price of the underlying asset.

If you want to sell puts naked (i.e. uncovered options), then you would be using additional leverage. This is where some traders (like Victor Niederhoffer) run into trouble. With that same $4,800 in buying power, with a naked options position, you could sell typically sell 5 puts. The margin requirements for short puts depend on your options broker as well as the underlying asset. Futures options in the US work under SPAN margin, so requirements to write options are typically less than they are for equities.

If you have a portfolio margin account, the requirements for uncovered equity options and futures options will more or less be the same.

What about Theta (Time) Decay?

Theta decay for a short puts is extremely favorable. Because puts tend to trade richer than calls due to the possibility of a “crash,” puts are often quite expensive. And because puts are expensive, option sellers take advantage of the high level of theta decay.

Everyday, premium will be systematically priced out of the puts, and the seller of a put option will collect this premium. It’s worth noting, however, that the algorithms that price and trade options are fully aware of an option’s premium decay. Suffice it to say that theta decay is not necessarily an “edge” in trading.

Nevertheless, entire hedge funds and individual traders have built their trading careers around selling naked puts and managing to dodge volatility explosions and market crashes. Basically, traders like selling puts because it works a lot of the time. It’s just that on the rare occasion when it doesn’t work, it can go VERY bad VERY quick.

When Should I close out a Short Put?

Since the short put option strategy has a limited profit, short puts should always be closed out when the premium is near zero or less than $0.05

This is because the last 5 cents of a put, even if it’s far OTM, can stay bid almost up until expiration. At a certain point, the risk/reward of holding a short put simply becomes unfavorable when there is no premium left to decay. This holds true even for short puts that are worth less than $0.15

If a short put has reached its max profit, it is always wise to close it out. The only exception would be a short put that is significantly OTM with a brief amount of time until expiration. By leaving the short put on, you could potentially save on commissions.

For short puts that are unprofitable, it is possible to continue to roll the position until volatility contracts or the price of the underlying asset goes up.

Anything I Should Know about Expiration?

Yes. If short puts expire OTM, there is nothing that needs to be done. Often times traders do not want to take unnecessary expiration risk, so they close out worthless short puts prior to expiration. This is the case for options that settle after they expire, like some series of SPX options.

If a short put is in the money at expiration, and past the break-even point, it will be a losing trade. If this happens, an assignment risk exists.

An assignment risk technically exists any time a short put is in-the-money on a US stock, although it’s very uncommon for short puts to be assigned prior to expiration unless they are deep ITM.

If a trader does not have enough money to acquire the underlying asset at the strike price of the short put, i.e. an uncovered put option position, a margin call will be issued after expiration. Typically options brokers notify their clients if a short options position is going to have a negative margin impact.

If the trader has enough money to acquire the underlying at the short put strike price, the appropriate number of shares or futures contracts will be assigned to the account.

Important Put Selling Tips

To the surprise of many, short puts (whether naked or covered) resemble a significant portion of professional trader’s portfolios. This is primarily because selling puts is a fantastic way to collect option premium and possibly accumulate more of an underlying asset at lower a lower price.

Additionally, short puts are also a popular way to express a bearish outlook on volatility itself. When volatility decreases, the value of puts decrease as well.

However, the flipside to that coin is that short puts are sensitive to volatility increases. This is because volatility (as discussed in the beginner’s guide to options) is a major component in an option’s price. If volatility dramatically increases, a short put position will exponentially increase in value leaving the put writer holding the bag.
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Uncovered Put writing

Uncovered Put writing

Naked Put

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Short put – uncovered (“naked”)

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To profit from expected short-term neutral-to-bullish price action in a stock or market index.


Example of short put – uncovered (“naked”)

Sell 1 XYZ 100 Put at 3.15

In return for receiving the premium, the seller of a put assumes the obligation of buying the underlying instrument at the strike price at any time until the expiration date. Although not unlimited, the risk is substantial, because the price of the underlying can fall to zero.

Speculators who sell uncovered puts hope that the price of the underlying stock or market index will trade sideways or rise so that the price of the put will decline. Since stock options in the U.S. typically cover 100 shares, the seller of the put in the example above receives $3.15 per share ($315 less commissions) and assumes the obligation to buy 100 shares of XYZ stock at $100 per share until the expiration date (usually the third Friday of the expiration month).

In-the-money options are automatically exercised if they are one cent ($0.01) in the money. Therefore, if an uncovered short put position is open at expiration, it is highly likely that it will be assigned and a long stock position will be created. Uncovered short puts are frequently described as “naked short puts,” because speculators who sell uncovered puts typically do not want a long stock position. As a result, the writers (or speculators) usually close the puts if they are in the money as expiration approaches. Short puts can be closed by entering a “buy to close” order.

Maximum profit

The potential profit is limited to the premium received less commissions, and this profit is realized if the put is held to expiration and expires worthless.

Maximum risk

Risk is substantial, because the price of the underlying can fall to zero.

Breakeven stock price at expiration

Strike price minus premium received.

In this example: 100.00 − 3.15 = 96.85

Profit/Loss diagram and table: Short 100 Put @ 3.15

Appropriate market forecast

Selling a put uncovered requires a neutral-to-bullish forecast. The forecast must predict that the stock price will not fall below the break-even point before expiration.

Strategy discussion

Selling an uncovered put based on a neutral-to-bullish forecast requires both a high tolerance for risk and trading discipline. A high tolerance for risk is required, because risk is substantial. In practice, a sharp decline in stock price can cause very large losses, losses that could exceed account equity. An unexpected announcement of bad news might cause the underlying stock to gap down in price, which could result in such a loss. Trading discipline is required because the ability to “cut losses short” is an attribute of trading discipline. Many traders who sell uncovered puts have strict guidelines – which they adhere to – about closing positions when the market goes against the forecast.

Impact of stock price change

Put prices, generally, do not change dollar-for-dollar with changes in the price of the underlying stock. Therefore, an investor who sells an uncovered put will typically make or lose less than the owner of 100 shares of stock as the stock price fluctuates.

Put options change in price based on their “delta,” and long put options have negative deltas. Short put option positions, therefore, have positive deltas. At-the-money short puts typically have deltas of approximately +50%, so a $1 rise or fall in stock price causes an at-the-money short put to make or lose approximately 50 cents. In-the-money short puts tend to have deltas between +50% and +100%. Out-of-the-money puts tend to have deltas between zero and +50%.

Impact of change in volatility

Volatility is a measure of how much a stock price fluctuates in percentage terms, and volatility is a factor in option prices. As volatility rises, option prices tend to rise if other factors such as stock price and time to expiration remain constant. As a result, short put positions benefit from decreasing volatility and are hurt by rising volatility.

Impact of time

The time value portion of an option’s total price decreases as expiration approaches. This is known as time erosion. Short puts benefit from passing time if other factors remain constant.

Risk of early assignment

Stock options in the United States can be exercised on any business day, and the holder of a short option position has no control over when they will be required to fulfill the obligation. Therefore, the risk of early assignment is a real risk that must be considered.

Sellers of uncovered puts must consider the risk of early assignment and should be aware of when the risk is greatest. Early assignment of stock options is generally related to dividends, and short puts that are assigned early are generally assigned on the ex-dividend date. In-the-money short puts whose time value is less than the dividend have a high likelihood of being assigned.

Potential position created at expiration

If a put is assigned, then stock is purchased at the strike price of the put. In the case of an uncovered put where there is no offsetting short stock position, a long stock position is created. Since options are automatically exercised at expiration if they are one cent ($0.01) in the money, if a seller of an uncovered put wants to avoid having a long stock position when a put is in the money, the short put must be closed prior to expiration.

Other considerations

Speculators who sell uncovered puts generally do not want a long position in the underlying stock. It is therefore necessary for such speculators to watch uncovered short put positions closely and to close a position if the market moves against the neutral-to-bullish forecast. A short put position can be closed by entering a buy to close order.

BufferedWriter not writing everything to its output file

I have a Java program that reads some text from a file, line by line, and writes new text to an output file. But not all the text I write to my BufferedWriter appears in the output file after the program has finished. Why is that?

The details: the program takes a CSV text document and converts it into SQL commands to insert the data into a table. The text file has more than 10000 lines which look similar to following:

The program seems to work fine except it just stops in the file randomly half way through creating a new SQL statement having printed it into the SQL file. It looks something like:

This happens after about 10000 lines but several hundred lines before the end of the file. Where the break happens is between a 1 and a , . However, the characters doesn’t seem important because if I change the 1 to a 42 the last thing written to the new file is 4 , which is cutting off the 2 from that integer. So it seems like the reader or writer must just be dying after writing/reading a certain amount.

My Java code is as follows:

8 Answers 8

You need to close your OutputStream which will flush the remainder of your data:

The default buffer size for BufferedWriter is 8192 characters, large enough to easily hold hundreds of lines of unwritten data.

You must close() your BufferedWriter . You must close() your BufferedWriter because it IS-A Writer and thus implements AutoCloseable , which means (emphasis added) it is

A resource that must be closed when it is no longer needed.

Some people say you must first call flush() for your BufferedWriter before calling close() . They are wrong. The documentation for BufferedWriter.close() notes that it “Closes the stream, flushing it first” (emphasis added).

The documented semantics of flushing ( flush() ) are

Flushes this stream by writing any buffered output to the underlying stream

So, you must close , and close will flush any buffered output.

Your output file does not include all the text you wrote to your BufferedWriter because it stored some of that text in a buffer. The BufferedWriter never emptied that buffer, passing it through to the file, because you never told it to do so.

Since Java 7, the best way to ensure an AutoCloseable resource, such as a BufferedWriter , is closed when it is not longer need is to use automatic resource management (ARM), also known as try-with-resources:

You must also close your BufferedReader when it is no longer need, so you should have nested try-with-resources blocks:

A resource that must be closed when it is no longer needed.

Some things to consider:

  • BufferedWriter.close() flushes the buffer to the underlying stream, so if you forget to flush() and don’t close, your file may not have all the text you wrote to it.
  • BufferedWriter.close() also closes the wrapped Writer. When that’s a FileWriter, this will ultimately close a FileOutputStream and tell the OS that you’re done writing to the file.
  • The garbage collector will automatically call close() , not on the BufferedWriter or the wrapped FileWriter, but on the FileOuputStream. So the OS will be happy, but you have to wait for the GC.
  • However, you always want to release OS resources as soon as you no longer need them. This goes for open files, database connections, print queues . anything. Trust me on this one.
  • BufferedWriter.close() does clear up the internal character buffer, so that memory will be available for garbage collection, even while the BufferedWriter itself remains in scope.

So, Always close your resources (not just files) when you’re done with them.

If you really want a peek under the covers, most of the Java API’s source is available. BufferedWriter is here.

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