Interest and Options:

Do I Get Charged Interest For Writing Puts?

Question - Re: interest and options, do I get charged interest for writing puts?

Answer

Not at all.

If you're new to trading options, the whole process can seem overwhelming at times. Trying to understand the intricacies of all the option trading strategies that are out there can be confusing when you first set out. But once you work through an individual strategy a few times (preferably on paper, or a spreadsheet, at first), it all begins to make a lot more sense.

It also might be helpful to review a related page in the Trading Options FAQ section: When Do You Get Premium When You Write an Option? as well as the Credit Spread (Option Income) section of this website.

It's important to remember what's actually going on when you write a put (also known as a short put) - you're basically agreeing to buy 100 shares of stock (the underlying) at a certain price (strike price) by (or at) a certain date (expiration date).

Now, the only reason anyone would want to sell you their shares at the agreed upon strike price is if the share price dropped below that strike price.

So in exchange for the risk you assume for opening up this short put position, you get compensated with an immediate cash payment. Your short put has a negative value and initially corresponds to the value of the cash you received (factoring out commissions and the bid-ask spread).

As expiration nears and/or the underlying stock increases in value, the value of the short put will decrease. As long as the stock closes above the strike price, the put will expire worthless and you will have no further obligation - the cash received is 100% profit and yours to keep for the risk you assumed.

Conversely, as the stock declines in price, the short put increases in value (as does your obligation). If the stock closes below the strike price at expiration, you will be obligated to purchase the shares at the agreed upon strike price (but the cash you received is yours to keep and will thus lower your cost basis by that amount on the shares you acquire).

Or you can choose to purchase back the short put, presumably for a loss as the cost to close it exceeds the cash you received to open it. If you buy to close the put prior to expiration, you will no longer be under any obligation to purchase the underlying stock.

So you can see that there is really no cause for your broker to charge you interest for writing a put. On the contrary, depending on your broker, you should actually be eligible to earn interest on the premium you receive when you write a put.