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.
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.