How it works
You SELL 1 contract = the obligation to buy 100 shares at the strike IF the buyer exercises. You collect the premium × 100 immediately.
At expiration:
• If the stock is ABOVE the strike: the option expires worthless → you keep 100% of the premium. Max profit.
• If the stock is BELOW the strike: you are ASSIGNED → you must buy 100 shares at the strike, even if the market is at $70 and the strike is $95. Loss = (strike − price) × 100 − premium.
Worst case: the stock falls to 0 → you must buy 100 shares at $95 that are now worthless. Loss = strike × 100 − premium.
Concrete example
Stock XYZ at $100. You sell a put with strike 95, premium $2.50, 30 days. Premium collected: $250.
At expiration:
• XYZ at $100 or more → put expires OTM, you keep $250. ROI = $250 on ~$9,500 of collateral = 2.6% in 30 days.
• XYZ at $95 → ATM, you keep $250.
• XYZ at $92.50 → break-even. P&L = 0 (assigned at 95, worth 92.50, premium offsets).
• XYZ at $85 → assigned. You buy 100 XYZ at $95. Paper loss = (85 − 95) × 100 + 250 = −$750.
• XYZ at $50 → disaster. Loss = (50 − 95) × 100 + 250 = −$4,250.
You can see the asymmetry: capped gain, massive possible loss.
Why do it despite the risk?
If you would be happy to buy the stock at $95 (because you think it is undervalued there), then the short put becomes win-win:
• Scenario A: the stock stays >95 → you collect 2.6% in 30 days doing nothing.
• Scenario B: the stock falls to 90 → you are assigned at 95, net price = $92.50 (with the premium). That is what you wanted to pay anyway.
A popular strategy known as the "wheel": sell puts to acquire a stock at a discount, then sell covered calls on it once assigned.
Key point: only sell on names you REALLY want to own.
Margin vs Cash-Secured
Two ways to secure a short put:
1. **Cash-Secured**: you set aside the full strike × 100 in blocked cash in your account. For strike 95 = $9,500 blocked. This is the safe version, recommended for beginners. You cannot be margin-called.
2. **Margin**: your broker typically requires ~20% of the strike ($1,900 for strike 95). 5× leverage. If the stock falls, the margin requirement rises — risk of a margin call forcing a sale.
Polaris ALWAYS recommends cash-secured for the first few years. See the next page for the structured Cash-Secured Put version.
Approval level required
The naked short put typically requires level 3 (margin) or level 2 (cash-secured) at brokers. Questrade, IBKR: OK with documented experience. Wealthsimple: limited to defined strategies.
You must demonstrate to your broker your understanding of assignment risk and your financial capacity to absorb the purchase of the 100 shares at the strike.
⚠ AMF disclaimer
Options are high-risk derivative products. Losses can exceed the capital initially committed (particularly for uncovered short positions). Polaris provides educational content only — this is not investment advice. Consult a registered advisor (AMF) before any decision and make sure you have the appropriate level of approval from your broker.