A short put is a standing order to buy

Selling a put is easy to describe and easy to misread. You receive money now. In exchange, you agree to buy 100 shares at a fixed price if the buyer of the put decides to sell them to you before the contract expires. The money is the part everyone notices. The agreement is the trade.

The terms of the agreement

Take a stock trading at $50. You sell one put with a $45 strike that expires in 30 days, and the market pays you $1.20 per share for it: $120 for the contract. From the moment the order fills, three things are true.

• The $120 is yours. It's credited to the account and nothing takes it back.
• Until expiration, someone can require you to buy 100 shares at $45, whether the stock is at $44 or $4.
• If you sold it cash-secured, the broker sets aside $4,500, the full purchase price, so the account can meet the obligation.

The buyer will only use that right when it pays them, which means when the stock is below $45. So the shape is fixed: you will never be forced to buy above the strike, and you will almost always be forced to buy if the stock finishes below it.

Every ending for the same trade

Thirty days pass. Here is what the position looks like at different closing prices.

Stock at expiration	What happens	Where you stand
$52	Put expires worthless	Keep $120. No shares.
$45.50	Put expires worthless	Keep $120. No shares.
$44	Assigned: buy 100 shares at $45	Shares worth $4,400, paid $4,500, plus $120 kept: up $20, holding stock.
$43.80	Assigned	Breakeven. Shares worth $4,380, paid $4,500, plus $120: zero.
$38	Assigned	Shares worth $3,800, paid $4,500, plus $120: down $580.
$0	Assigned	Down $4,380. The most the trade can lose.

Notice that the best outcome is the same at $52 as it would be at $200: $120. The stock's upside is not yours. And the worst outcome is nearly the price of the stock. That asymmetry isn't a flaw. It's what you're being paid for, and the premium only makes sense if you've priced the whole table, not the top row.

Reading the premium as a return

$120 on $4,500 of collateral is 2.7% for 30 days. Annualized without thinking, that's about 32%, which is the number that makes people sell too many. The honest version: 2.7% is what you earn in the four months out of five where nothing much happens, and the fifth month decides whether the year was worth it.

The breakeven, strike minus premium, is more useful than the return. At $43.80 it's the price the stock has to stay above for you to come out ahead even if you're assigned, and it's the price at which you should be asking whether you'd be glad to own the shares.

Before expiration

Equity options are American-style, so the buyer can exercise early. In practice early assignment on a put is uncommon unless it's deep in the money with little time value left; most of the time the buyer gains more by selling the put than by exercising it. You can also close the position yourself at any point by buying the same put back. If the stock drifts up and the put is worth $0.30 two weeks in, buying it back locks in $90 of the $120 and frees the collateral. Plenty of sellers do exactly that rather than sit through the last week for the last dollar.

What the trade actually is

A short put is a limit order to buy the stock at $45 that pays you to place it, with two differences: you can't cancel it for free, and it fills at $45 even when the stock is at $30. If you would happily buy 100 shares of this company at $43.80 and hold them through a bad quarter, the trade is coherent. If you wouldn't, the premium is paying you to make a promise you don't want kept.