Short Out-of-the-Money Put

A short put is an options trade in which the seller conveys to the buyer the right to sell, or go short, futures at a specific price for a specific period of time.

In this example, the writer of the put option is obligated to buy the underlying crude oil futures at $18 a barrel, or gold futures at $250 per ounce, at any time up to expiration, if a holder of an options contract chooses to exercise it. The position realizes maximum profits if crude oil futures are trading at $18 or above, or gold is trading at $250 or above at expiration, making it unlikely that the options contract will be exercised. Profits are limited to the premium received, while risk is theoretically unlimited if futures prices fall. Declining volatility is favorable to this trade, as is the passage of time.

Position Premium Dollar Premium Delta Sell one $18 crude oil put $0.50 $500 +.29 Maximum risk Unlmiited on the downside Maximum profit $0.50 per barrel $500 per position Break-even futures price $17.50 Position Premium Dollar Premium Delta Sell one $250 gold put $3.00 $300 +.30 Maximum risk Unlimited on the downside Maximum profit $3.00 per oz. $300 per contract Break-even futures price $247.00