It's called a married or protective put. For the position to be profitable the stock needs to rise beyond the price you paid for the long put. Conversely, if the stock falls, the put gains in value and (depending on the strike and greeks) wil offset the loss on the stock. That's the drive-by explaination, anyway.
You need a solid run up in a short amount of time and no decrease of volatility for this to be profitable. Otherwise the option premium is going to eat a lot of your profit.
JMBA. I expect exactly this to happen. Should the put be ITM? I'm thinking my graph doesn't factor in assignment, into my profits.
As posted this isn't a married put. The original post says sell the put. There is no common name for this combined position. It may be a mispost. The common name for a married put - if it were a purchased put - would be the married put or a synthetic call.
A married or protective put is when you buy a stock and buy a put to limit your loss in the event price falls. When you buy a stock and sell a put, you are making a double bullish bet. If the stock price falls you lose money on the stock purchase and you lose money on the put you sold. Selling a put only provides protection if you short a stock. That way if the stock price rises (going against your short position), the put you sold loses value, providing some mitigation of your unrealized loss.
So just to make sure, if I'm selling a put at a strike price of 5, that means if I get assigned someone else gets to buy it at that price?