A short put setup involves selling one put at trade entry (writing a put).  This obligates the seller to buy the underlying shares at any point during the life of the contract at the strike price of the option.  The trade is usually initiated at a strike price near the money or out of the money.  In exchange for selling the put and taking on this obligation, the short put trader receives premium from the counterparty.

The short put setup is frequently used by beginner and seasoned options traders alike.  This setup, when optimized as part of an overall strategy, is often called a “paid-to-wait” strategy, where the trader is compensated for making the commitment to buy the shares at a discount.  This setup is very well suited against stock that you would like to eventually own.

This setup is synthetically equivalent to a “covered call” setup, which is often touted as an excellent strategy for beginner options traders.  The advantages of a short put setup compared to a covered call setup is reduced capital requirements for the put sell, simpler execution and management, and generally higher max profit by using put options vs. call options.