Short Put

A short put position is created by selling (writing) a put option, collecting premium upfront in exchange for the obligation to buy the underlying asset at the strike price if the buyer exercises. The maximum profit is the premium received (when the stock stays above the strike), and the maximum loss is the strike price minus the premium (if the stock drops to zero). Short puts are the economic equivalent of covered calls and have the same risk/reward profile. When backed by sufficient cash, it is called a cash-secured put. Short puts are commonly used to generate income, to enter stock positions at a desired lower price, and as part of the wheel strategy. The strategy benefits from time decay (positive theta) and declining implied volatility. Assignment results in purchasing shares at the strike price, which many traders view as a feature rather than a risk.