What is the cushion on a short put?
In one line: The cushion is how far a stock can fall from today's price before a short put loses money at expiry, measured down to the break-even price.
How it works
The cushion is the room between today's stock price and your break-even. On a short Put option, break-even is the Strike price minus the premium you collected. Above that price at expiry, you keep money. Below it, you lose.
Cushion = stock price − (strike − premium).
People often show it as a share of the stock price, too. A $5 cushion on a $50 stock is a 10% cushion. Same idea: the stock can fall 10% before the trade is under water at expiry.
The cushion is a distance, not a forecast. It says how far the stock can fall. It says nothing about whether it will.
An example (hypothetical)
XYZ trades at $50 (an illustration, not a trade idea). You sell a $45 put for $1.00 and collect $100.
- Break-even: $45 − $1.00 = $44.
- Cushion: $50 − $44 = $6, or 12% of the price.
| XYZ at expiry | Inside the cushion? | Result |
|---|---|---|
| $50 | Yes | +$100 |
| $46 | Yes | +$100 |
| $44 | Right at the edge | $0 |
| $40 | No, $4 past it | −$400 |
| $35 | No, $9 past it | −$900 |
Once the stock falls past the cushion, every dollar lower costs you $100. The cushion doesn't shrink the loss below it. It only sets where the loss starts. A math example, not a promise.
Why it matters for sellers
The cushion is a quick way to compare two puts. A strike close to the price pays more but leaves less room. A lower strike pays less but gives more room. Seeing both as a cushion puts them on one scale.
Then compare the cushion with the stock's normal swings. If XYZ often moves 12% in a month, a 12% cushion is thin. The Implied volatility in the option's price tells you how big a move the market expects. Our implied volatility guide shows how to read it.
The cushion only counts at expiry. Before then, a fast drop can make the put cost more to buy back, even while the stock is still above break-even. And one bad gap, like an earnings miss, can jump past the whole cushion overnight. That's why sellers check for a Binary event first.
In the wheel strategy, the cushion is your first bit of room. It is not protection.
Questions
Is a bigger cushion always better?
Not always. A bigger cushion usually means a lower strike and a smaller premium. It's a trade-off between room and pay, and the stock can still fall past any cushion.
Does a covered call have a cushion too?
Yes, the same way. Your break-even is what you paid for the shares minus the premium. The cushion is the distance from today's price down to that number, and it's usually small.
How do I find the cushion on my broker's screen?
Most brokers show the break-even on the order ticket. Subtract it from the stock price. Divide by the stock price if you want it as a percent.
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