Market view that suits writing a put
Question
What view on a stock would make you want to have a short put position on it?
Short answer
Neutral to bullish on price, and bearish on volatility. A short put collects premium and profits if the stock stays above the strike, so you expect no large decline. It also pays when implied volatility looks too high relative to what you expect to realise, and suits someone happy to buy the stock at the strike if assigned.
Adapted from Crack, Heard on the Street, Q2.45, p.30; question and answer rewritten by SelfMadeQuant.com.
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Open the worked solutionLessons behind this question
- Market Model and Risk-Neutral Valuation
- Option Mechanics: Calls, Puts, Moneyness, Intrinsic Value, and Exchange vs. OTC Markets
- Option Trading Strategies: Spreads, Combinations, and Payoff Engineering
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