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Selling puts is a great way to lower the cost basis of a stock or ETF you wish to purchase or to simply act as a way to create income on a consistent basis.
What’s required?
- Sell a put
- Have enough cash in your account to cover the purchase of the stock if the put is assigned
Strategy Difficulty
- Appropriate for newbies, professionals and everyone in between.
The Strategy
Selling a put obligates you to buy shares of a stock or ETF at your chosen short strike if the put option is assigned.
For example, let’s say you wanted to buy Twitter (TWTR), but not at the current price of $47.34. You prefer to pay $42.
By selling the March 42 puts you can bring in approximately $0.55 or $55 per contract. In this instance, you are selling the put with the intent of buying the stock for $42 if, at expiration in roughly 30 days, the stock is trading at or below $42.
Selling the $42 put requires you to have $4,200 of cash in your trading account. Typically, selling puts only require 20% of the $4,200, but retirement accounts and certain brokers require the puts to be cash-secured. And in this case, that would be the $4,200. The return on the trade is 1.3% over roughly 30 days….15.6% annually. And if the puts were not cash-secured, the return would be significantly higher, but I will save that for another post.
As you can see from the options chain below, you have other levels where you can sell puts. If you choose to sell a strike closer to the current price of the stock, say $44, you could bring in even more premium ($0.99 or $99 per put contract sold), but the probability of success goes from 80.64% for the 42 puts to 70.12% for the $44 puts. So, you do have to make a few decisions as to how much risk you are willing to take based on the strike you choose.
Back to our example, we decided to sell the March 42 puts for $0.55. The $55 is ours to keep regardless of what occurs with Twitter.
If the stock closes at March expiration above $42, we keep the $55 and oftentimes repeat the process by selling more puts, maybe at the $42 or possibly at a different strike price. It truly depends on where the stock is trading at the time we sell the puts and how much premium we wish to bring in.
If the stock trades for less than $42 at March expiration we are assigned the stock at $42, 100 shares per put contract sold. Oftentimes when this occurs I will begin to sell covered calls on the stock so there is an ongoing source of income coming in. I take this approach in one of my High Yield Trader portfolios, appropriately named, The Income Cycle. If you would to learn more, click here.
Alsof you would like to know more about covered calls or the other options strategies I use in my High Yield Trader and Options Advantage services, please sign-up for my FREE weekly newsletter, The Strike Price.