Strategy description

· Sell a put, strike price A
· Generally, the stock price will be above strike A

All stars

You’re bullish to neutral.

Strike A minus the premium received for the put.

There’s a large sweet spot. As long as the stock price is at or above strike A at expiration, you make your maximum profit. That’s why this strategy is enticing to some traders.

Potential profit is limited to the premium received for selling the put.

Potential loss is substantial, but limited to the strike price minus the premium received if the stock goes to zero.

Margin requirement is the greater of the following:
· 25% of the underlying security value minus the out-of-the-money amount (if any), plus the premium received
· OR 10% of the underlying security value plus the premium received.

NOTE: The premium received from establishing the short put may be applied to the initial margin requirement.

After this position is established, an ongoing maintenance margin requirement may apply. That means depending on how the underlying performs, an increase (or decrease) in the required margin is possible. Keep in mind this requirement is subject to change and is on a per-contract basis. So don’t forget to multiply by the total number of contracts when you’re doing the math.

For this strategy, time decay is your friend. You want the price of the option you sold to approach zero. That means if you choose to close your position prior to expiration, it will be less expensive to buy it back.

After the strategy is established, you want implied volatility to decrease. That will decrease the price of the option you sold, so if you choose to close your position prior to expiration it will be less expensive to do so.