Strategy: Basic strategy Opening the position Sell a Put option with a strike price lower than the current market price of the underlying security.
Steps Entry: Is the market trend actually increasing or stagnating after the option purchase? Write a Put option with lower strike price than the current price of the underlying security OTM Put.
Write a Put option with a strike price close to the current price of the underlying security ATM Put if there is no upcoming earnings.
The option should be sold only if the writer thinks that the share price will rather increase than fall. Exit: The writer hopes that the price of the underlying will increase or stagnate, so the options will expire worthless and he can keep the premium. If the share price decreases below the Stop Loss level, the writer can leave the position by buying back the sold option.
Basic characteristics Maximum loss: Strike price - premium. Increasing as the prices fall. Maximum profit: Limited.
The profit cannot be bigger than the premium received. Time decay: Time decay has a positive effect on the Short Put.
The closer the option to expiration the more it increases its value. Breakeven point: Strike price - premium.