PUT SELLING TRADING TIPS
Using This Strategy
Selling puts is a short-term strategy you can use to generate some monthly income. Ideally, you’ll want to sell “out-of-the-money” puts on stocks you want to own that are trading higher than the strike price of the put option you sold. A put option is out-of-the-money when the strike price is lower than the current stock price.
Choosing Your Stocks
You’ll want to use this strategy when you’re expecting a stock to trade higher or in a sideways range. It’s also best to use highly liquid stocks. Liquidity basically describes how easy it is to convert a stock or any other security into cash. You want stocks with the most liquidity in your portfolio because you can essentially cash them out quickly and easily when you need to.
Choosing Your Options
The same applies when choosing the put option you want to sell. You’ll want to choose options with an open interest of at least 100, but 500 and higher is best. You’ll want to choose a strike price that’s below the current stock price. And finally, you’ll want to use options with an expiration date that’s 30 days out or less. Remember, this is a short-term income strategy, so you don’t want to trade any options that expire more than 30 days out.
Opening Your Trade
- Choose a stock that you think will move sideways to higher within the next 30 days.
- Sell the put option with a strike price that’s lower than the stock’s current price and an expiration date that’s 30 days out or less. Just keep in mind that the farther out the expiration date is, the less you’ll receive for selling the put – but the higher the probability that the trade will be profitable.
- GET PAID. This is called the “premium” that you get from selling the put option.
Closing Your Trade
- Wait for the stock to either rise in price or stay exactly where it is. If the stock goes up, the put option you sold expires worthless – and you keep 100% of the premium. If the stock goes sideways, the put option expires worthless – and you keep 100% of the premium.
- If the stock does neither and moves down instead of up or sideways, you can do one of three things:
- You can buy back the put option at its current market price.
- You can be assigned the shares of the stock at a discounted strike price (but only if you actually like the stock enough to do this), OR…
- You can buy back the put option and at the same time, sell another put option with a different strike price and an expiration that’s farther out. This is called “rolling out” and is the cheapest, most effective way to leverage a losing trade – without requiring more margin. And the best part is, you save yourself from having to buy shares of the stock. In fact, of these three choices – this is the one I’d use myself.
Here’s an example in Fig. 4…
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On April 2, I sold three puts on Amazon.com, Inc. (AMZN) because I believed the stock would either trade in a sideways range or move higher over the next 30 days. At the time, it was trading right around $1,371.99.
When I opened the trade, I received a $175 premium per contract ($1.75 x 100 shares per contract) for a total credit of $525.
Then, I simply waited for AMZN to either stay exactly where it was or move higher – and that’s exactly what happened…
As I predicted, the stock gained around 4.3% over the next four days. And on April 6, I let my put options expire worthless – and pocketed that $525 for a later day (minus brokerage fees, of course). (Fig. 5)
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