The sale of put options can be an excellent way to gain exposure to a stock on which you are bullish with the added benefit of potentially owning the stock at a future date at a price below the current market price. To understand how selling puts may benefit your investment strategy , a quick primer on options may be helpful to some.

Put Options Very simply, an equity option is a derivative security that acquires its value from the underlying stock it covers. Owning a call option gives you the right to buy a stock at a predetermined price, known as the option exercise price. A put option gives the owner the right to sell the underlying stock at the option exercise price.

Thus, buying a call option is a bullish bet - you make money when the stock goes up, while a put option is a bearish bet because if the stock price declines below the put's exercise price, you can still sell the stock at the higher exercise price. The exact opposite view is taken when you sell a call or put option. Most important, when you sell an option you are taking on an obligation not a right.

Once you sell an option, you are committing to honoring your position if indeed the buyer of the option you sold to decides to exercise. Here's a summary breakdown of buying versus selling options. Characteristics of Prudent Put Selling Since selling a put puts you in an obligatory position of taking ownership of a stock, the first important rule of put selling is revealed: In addition, you should only enter into such a trade where the net price paid for the underlying security is an attractive price.

This is by far the most important consideration, if one wants to sell puts successfully during any market environment. There are other reasons to sell a put, such as when you are executing more complex options strategies, learn more in Iron Condors Fly On Fragile Wings and Advanced Option Trading: The Modified Butterfly Spread. Once this rule is satisfied, then the other benefits of put selling can be exploited.

One benefit is the ability to generate income on your portfolio. If the sold put expires without exercise, the seller keeps the entire premium.

How To Sell Put Options To Benefit In Any Market

Another key benefit is the ability to own the underlying stock for a price below the current market price. The Method at Work An example will better illustrate both the benefits and potential risks when selling a put.

Consider shares in Company A, which continues to dazzle investors with increasing profits from its revolutionary products. So, you collect the option premium and wait.

Learn more about put option strategies in Bear Put Spreads: A Roaring Alternative To Short Selling. Risks You can see why it's prudent to sell puts on stocks you would love to own. If you don't have that cash in your portfolio, your broker can force you to sell other stocks in order to buy this position.

Another risk in a different sense is that Company A shares continue to appreciate. You can make money on a falling stock. Find out how going long on a put can lead to profits; read Prices Plunging? The Bottom Line In the end, utilizing the sale of put options can be a very prudent way of generating additional portfolio income.

You also get exposure to the stocks you would like to own, but want to limit your initial capital investment. You forgo additional upside of course, but if you sell a put and the stock price goes up, you are making money, so all is good. As long as the underlying stocks are of companies you are happy to own, put selling can be a lucrative strategy. Dictionary Term Of The Day.

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This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. How To Sell Put Options To Benefit In Any Market By Sham Gad Share.

When does one sell a put option, and when does one sell a call option?

Options Basics Call Options Vs. Buying a Call - You have the right to buy a stock at a predetermined price. Selling a Call - You have an obligation to deliver the stock at a predetermined price to the option buyer.

Buying a Put - You have the right to sell a stock at a predetermined price. Selling a Put - You have an obligation to buy the stock at a predetermined price if the buyer of the put option wants to sell it to you. Selling a put option is a prudent way to generate additional portfolio income and gain exposure to desired stocks while limiting your capital investment. All investors should be aware that the best time to buy stocks is when the market is tanking, according to history.

Investing with options can be a great strategy, but you need to do your research first or the risks can outweigh the benefits. Trading options is not easy and should only be done under the guidance of a professional. A brief overview of how to profit from using put options in your portfolio. Learn how this simple options contract can work for you, even when your stock isn't.

There are times when an investor shouldn't exercise an option. Find out when to hold and when to fold.

Options offer alternative strategies for investors to profit from trading underlying securities, provided the beginner understands the pros and cons.

Beginning traders often ask not when they should buy options, but rather, when they should sell them. Learn about put options, what they are, how these financial derivatives operate and when put options are considered to be Learn about put options, considerations to make before you select strike prices and how to select strike prices for your Learn about the difficulty of trading both call and put options.

Explore how put options earn profits with underlying assets Learn about investing in put options and the associated risks.

Selling Put Options: Better Yield Than Stocks

Explore how options can provide risk, which is precisely defined An expense ratio is determined through an annual A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all A legal agreement created by the courts between two parties who did not have a previous obligation to each other.

A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over No thanks, I prefer not making money.

Bear Put Spreads: A Roaring Alternative To Short Selling

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