Selling a Put Contract: Everything You Need to Know
When buyers are investing in an asset with the hope that the asset increases in value, using a put option can be the means to huge profit potential.3 min read updated on February 01, 2023
Successfully selling a put contract involves a lot of strategy. When buyers are investing in an asset with the hope that the asset increases in value, using a put option can be the means to huge profit potential. A put option contract allows the buyer to sell an asset at a set price, referred to as the strike price, within a specified timeframe.
What Is a Put Contact and What is Put Buying?
Generally, a put contract will cover 100 shares of stock for investors. Put buying simplifies the process in trade put options.
Put options allow profit from a slide in asset price, and it provides a bearish option trader a choice. In order to be profitable, the asset price must show a significant slide below the strike price.
For example, an XYZ company is currently trading at $40, and the strike price is $40 and due to expire in a month. Currently, it is priced at $2. After seeing the earning report for XYZ stock, you paid $200 to buy a single $40 XYZ put option for 100 shares. If your suspicions were right and XYZ plunges to $30, your put buying strategy earned you a profit of $800.
What Is the Long Put Strategy?
Known as the long put strategy, you have the option to use your put option after earnings and go to the open market and buy 100 shares of XYZ stock at $30 and sell 100 shares at $40 each. You will then profit $10 a share. This means you receive $1000 and after calculating the $200 purchase price, you profit $800 as well.
What Are Protective Puts?
In order to protect an existing long stock position, investors often buy put options. When buying for this purpose, they are known as protective puts. Using index puts, this also protects the entire portfolio of stocks.
What Are the Various Selling Put Options?
Selling puts involves risk but can be profitable if properly done. Put option writers, also considered sellers, will sell put options hoping the contract will expire without any worth, allowing them to pocket a premium.
- Covered Puts: A covered put writing strategy is implemented when an investor is bearish on the asset. This provides coverage for the seller in the event that the obligated quantity of the asset is not available.
- Naked Puts: The naked put strategy is in play when the investor is bullish and the seller did not short the obligated amount of the asset at the time of the put option sale. The short put is considered naked. Writing naked puts can often be a smart way to acquire discounted stocks if a bullish investor is patient for an extended period of time.
- Put Spreads: The option strategy known as a put spread allows an equal number of put option contracts involving the same security but varying in strike prices and expiration dates, to be bought and sold at the same time. Potential profit and maximum loss caps are limited for the options trader in a put spread.
Rules to Live By When Selling a Put Contract
Two rules to live buy when selling put options are to sell puts on the stocks you'd love owning and limit the number to an amount you are comfortable exercising.
Knowing when to write puts and when to collect is essential for positive profits. When underlying shares appear undervalued, this is the greatest time to write puts. Days when attractive stocks are hit hard can be excellent times to collect on big premiums.
It's important to note that everyone has a portfolio with a different value. If you have a massive capital base, your average-dollar commitment is going to be larger. You will need to consider this when deciding how many puts you should be selling.
Can Selling a Put Contract Produce Bonus Portfolio Income?
Option selling is like an art and risk management is critical. Choosing the most aggressive strike while not exceeding where the stock ultimately ends up on the date of expiration is often compared to playing the lottery. Bottom line, the sale of put options can be a wise method to produce bonus portfolio income and increase exposure to stocks you would like to own.
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