Quote:
Originally Posted by Nightfyre
Maximum loss of writing a put is 100 times the strike price, not unlimited. As it says in your link.
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That's a confusing way to explain it so I'll expand your answer.
If you "write" a single PUT, it means you are giving someone the right to PUT the stock to you at a specified price before a specific time. These are called NAKED PUTS.
So if someone wrote a single put contract, which equals 100 shares of the underlying stock, for let's say $1.72 for the put contract on US Steel with a strike price of $30 and the expiration of April 20, 2018 you would collect $172 minus a small commission.
So now if the stock plummets and goes down to $25, someone who owns the put option you sold can sell the stock to you at $30 and you must pay $3,000 for a stock now only worth $2,500. You have an immediate loss of $500 - your put money of $172.
The most you could lose would be if US Steel went to $0 and you got forced to pay $3,000 for stock that is now zero and you would be out the $3,000 - $172 premium you collected when you wrote the option.
Remember one thing, the higher the stock price when writing a naked put the greater the dollar loss if it goes against you.
Some hedge funds and traders who want to buy a stock at a cheaper price if it is too high now, write a large amount of naked puts as a way to own a lot of stock on a decline while collecting the premium. If it doesn't go down, they still make money on the premium they collected. They will usually buy the puts underneath the ones they wrote so if the stock drops too much, they have some protection when there is a huge drop. This is called a STRADDLE