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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 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.
Selling Cash-Secured Puts
Selling a put obligates you to buy shares of a stock or ETF at your chosen short strike price if the put option is assigned.
For example, let’s say you wanted to buy Microsoft (NASDAQ: MSFT), but not at the recent price of $52.18. You prefer to pay $49.
By selling the April 49 puts you can bring in approximately $0.58, or $58 per contract. In this instance, you are selling the put with the intent of buying the stock for $49 if at expiration in roughly 43 days the stock is trading at or below $49.
Selling the $49 put requires you to have $4,900 of cash in your trading account. Typically, selling puts only requires 20% of the $4,900, or $980, but retirement accounts and certain brokers require the puts to be cash-secured. In this case, that would be the $4,900. The return on the trade is 1.2% over roughly 43 days, or 9.5% annually. And if the puts were not cash-secured, the return would be significantly higher. But I will save that for another article.
As you can see from the options chain below, you have other levels at which you can sell puts. If you choose to sell a strike closer to the current price of the stock, say $50, you could bring in even more premium ($0.80, or $80 per put contract sold), but the probability of success goes from 74.97% for the 49 puts to 67.66% for the $50 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 April 49 puts for $0.58. The $58 is ours to keep regardless of what occurs with Microsoft.
If the stock closes at April expiration above $49, we keep the $58 and oftentimes repeat the process by selling more puts, perhaps at the $49 strike 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 $49 at April expiration, we are assigned 100 shares of the stock (at $49) 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 like to learn more about how The Income Cycle strategy works, please sign up for my upcoming webinar, at which I will discuss, in-depth, my approach to the strategy. Please click here to join.