{"id":15364,"date":"2022-12-29T05:02:00","date_gmt":"2022-12-29T05:02:00","guid":{"rendered":"https:\/\/businessyield.com\/?p=15364"},"modified":"2023-01-31T16:24:35","modified_gmt":"2023-01-31T16:24:35","slug":"sell-put-options","status":"publish","type":"post","link":"https:\/\/businessyield.com\/business-strategies\/sell-put-options\/","title":{"rendered":"Sell Put Options: Overview with Options Trading Examples","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"\n
Introducing options trading into all types of investment strategies has quickly grown in popularity among individual investors. For beginners, the major question that will arise is why traders would wish to sell options rather than to buy them. However, the selling of options confuses many investors because of the obligations, risks, and payoffs involved. They are different from those of the standard long option. Here will see the strategies of selling put options explained with examples and how to calculate using the put options calculator.<\/p>\n\n\n\n
Selling a put option allows an investor to potentially own the underlying security at a future date and a much more favorable price. In other words, the sale of put options allows market players to gain bullish exposure, with the added benefit of potentially owning the underlying security at a future date and a price below the current market price. Selling a put option can also be called writing a put option.<\/p>\n\n\n\n
A put option gives you the right, but not the obligation, to sell a stock at a particular price (known as the strike price) at a specific time, at the option\u2019s expiration. As a result, the put buyer pays the seller a sum of money called a premium. In contrast with stocks, which can exist indefinitely, an option will expire at expiration and then be settled, with some value remaining or completely worthless.<\/p>\n\n\n\n
Therefore, put options are in the money when the stock price is below the strike price at expiration. The put owner may exercise the option, thereby selling the stock at the strike price. Otherwise, the owner can sell the put option to another buyer at fair market value.<\/p>\n\n\n\n
A put owner makes a profit when the premium paid is lower than the difference between the strike price and stock price. Imagine a trader buying a put option for $0.70 with a strike price of $35 and the stock is $20 at expiration. The option is worths $15 and the trader has made a profit of $4.10.<\/p>\n\n\n\n
If the stock price is higher than the strike price at expiration, the put is out of the money and expires worthless. So, the put seller keeps any premium received for the option.<\/p>\n\n\n\n
In options trading, you can be a buyer or a seller. Here are the advantages of selling puts.<\/p>\n\n\n\n
Considering the same example as before, imagine that stock WXY is trading at $40 per share. You can decide to sell a put on the stock with a $40 strike price for $3 with an expiration in six months. Hence, one contract gives you $300, or (100 shares * 1 contract * $3).<\/p>\n\n\n\n
Read also: SHORT CALL: A best easy guide to master short call strategy<\/a><\/strong><\/p>\n\n\n\n Subsequently, the profit for the put seller will be exactly the inverse of that for the put buyer.<\/p>\n\n\n\n The merits of selling put are that you receive cash earlier and may not ever have to buy the stock at the strike price. So if the stock rises above the strike by expiration, you\u2019ll make money. However, you won\u2019t be able to multiply your money as you would by buying puts. As a put seller, your gain is capped at the premium you get upfront.<\/p>\n\n\n\n Selling a put seems like a low-risk proposition and sure it is. However, if the stock really rises so high, then you\u2019ll be on the hook to buy it at the much higher strike price. You\u2019ll also need the money in your brokerage account to do that. Most investors keep enough cash, or at least enough margin capacity, in their account to cover the cost of the stock. That is if the stock is put to them.<\/p>\n\n\n\n For example, if the stock fell from $40 to $20, a put options seller would have a net loss of $1,700. It can also be the $2,000 value of the option minus the $300 premium he will get. If done prudently, selling puts can be an effective strategy to generate cash, especially on stocks that you won\u2019t mind owning if they fell.<\/p>\n\n\n\n Put options can be used for commodities as well as stocks. Commodities are tangible<\/a> things like gold, oil, and other agricultural products, including wheat, corn, and pork bellies. In contrast to stocks, commodities aren’t bought and sold outright. You know, no one purchases and takes ownership of a “pork belly.” <\/p>\n\n\n\n Instead, commodities are rather bought as futures contracts<\/a>. These contracts are hazardous because they can expose you to limitless losses. Unlike stocks, you can’t buy just one ounce of silver. A single silver contract is worth 100 ounces of silver. If the silver loses $1 an ounce the day after you bought your contract, you’ve just lost $100. Since the contract is in the future, you could lose hundreds to thousands of dollars by the time the contract comes through.<\/p>\n\n\n\n We use put options in commodities trading because they are a lower-risk way to get into these highly risky commodities futures<\/a> contracts. In commodities, a put option gives you the option to sell a futures contract on the underlying commodity. If you buy a put option, your risk is limited to the price you pay for the put option (premium) in addition to any commissions and fees. Despite the reduction of the risks, most traders don’t exercise the put option. Instead, they close it before it expires. They just use it as insurance to hedge their losses.<\/p>\n\n\n\nMerits of Buying Puts<\/span><\/h2>\n\n\n\n
Selling Put Options Example Using Commodities<\/span><\/h2>\n\n\n\n