Selling Puts – Bullish Options Trading Strategy
Selling puts is very similar to a covered call but with a slightly different perspective. When you write a covered call you are speculating that the stock will either go up or stay the same. Also, with a covered call you must own the stock so that your risk is actually losing money to a falling stock. In order to make money with a covered call, you need the stock to go up or even go sideways.
Selling puts, however, does not require you to own the stock in advance. This is the beauty of selling puts. You can sell puts on margin; although it is necessary to research the margin requirements carefully. When selling puts margin requirements vary from broker to broker and the “premium” collected for the trade is deposited into your account on the day your trade is entered into.
There are a number of different reasons why you might want to sell a put on a stock. As mentioned earlier, with a covered call, it is necessary for the stock to go up or sideways to achieve a profit. When selling a put it is possible to make money when the stock is going down.
There are three ways you can do this and they are explained below.
- If the stock goes up then your put expires and you earn the premium.
- If the stock stays flat then your put also expires leaving you to earn the premium.
- If the stock drops less than the difference of the selling price and the put then you would again earn the premium.
- If the stock shows a weakness that you consider temporary then you can “buy back with a roll out”. This means that you buy back your option and then sell the put for the next month. This essentially buys you extra time for your stock to move positively. The entire process would move out one month and the same parameters.
- Finally, you can use marginable stocks in your portfolio to sell puts on additional stock which you can purchase below the current market price.
Once again, there are a number of ways to earn money selling puts, and two primary ways to lose money. First, if you hold a weak stock past its strike price and sell, you actually create a situation where you lose on your investment. Second, is if someone will “put” the stock to you at the put price. If your stock drops below the put price, minus premium, and someone puts the stock to you, you will lose money. This can be avoided with a “buy back with a roll out” or a simple buy back on your option.
Selling puts is a great way to accumulate stocks for a discounted price. This is a strategy that can potentially be used with your IRA to form a plan for long term investing. Many IRA underwriting companies may not allow you to do this; the IRS and SEC have deemed such a practice to be a suitable way to invest in your IRA.
When learning about selling puts don’t forget to also learn about buying calls.
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