A Short Put strategy might be considered by a risk-tolerant trader with the opinion that a stock’s price is likely to increase and/or volatility is likely to decrease. The put seller benefits from the passage of time and decreasing dividends. The maximum gain is the premium received, which occurs at any price above the strike price. The gain diminishes as the price of the underlying falls below the strike price. Breakeven occurs at the sum of the strike price less the premium received. At any price below that, the short put seller begins to lose money penny-for-penny as the underlying price decreases. Loss potential is substantial.
