Series 7: 5.1.4 Short Put

5.1.4  Short Put

On the other side of the long Salmonella put is a short put. If an investor shorts the same put on Salmonella Seafoods, she will receive the $1.50 premium that you, the buyer, will have paid. If at expiration the stock price has risen above the strike price of $20, the option will expire worthless, and the option writer will pocket her premium of $15,000 ($1.50 x 100 puts x 100 shares). If the price of the underlying stock drops below the strike price at $20, the option will be exercised, and the option writer will lose at least a part of the premium she had received. Once the stock price falls below its breakeven of $18.50 ($20 – $1.50), the put writer will begin to lose money. How much she can lose is capped by the fact that the stock price cannot go below zero. Her losses per share will be capped at the strike price minus the premium that she receives. In this case, ($20 – $1.50) x 100 puts x 100 shares = $185,000.