Selling a put can be a great way to make money from the stock market. It is a strategy that I use a lot and for one simple reason, it works.
Any time you decide to sell a put what you are doing is selling someone else the right to sell you a certain stock at a given strike price on or before a given date.
For Example, if you sell the $40 put on a stock and make $3 off of the option. You now hold the obligation to buy that stock at $40 should the buying party choose to exercise that right. Even if the stock falls all the way to $20 you would still have to buy it at $40. On the other hand if the option expires then you walk away with the profit.
If you are right it can be very profitable. If you are wrong, there can be a lot of risk associated with it, but there are a few things you can do to minimize the risk. They are.
1. Only Sell puts on stocks you want to own
If you are selling puts only on stocks that you do not mind owning, then you are actually taking less of a risk by selling an option then you are if you would have just bought the stock.
Let’s say you wanted to own stock ABC and it was trading at $43. You could buy it and hold onto it for the long term. If it falls to say $30 and it still looks like a great investment you would still hold onto it right?
Well if you sold a $40 put on it and it drops to $30 you are not risking losing $43, you are only risking $40 minus the $3 you received to take on the risk, so $37. Your breakeven point is much lower.
So selling puts only on stocks that you do not mind holding onto for the long term, and that you can afford to buy can greatly help you in your quest.
2. Sell a bull put spread
Creating a bull put spread is also a great way to limit your loss when something turns against you. It consists of not only selling a put but buying a lower put as well.
Let’s say instead of just selling the $40 put you sell a $40 put for $3, but you also buy the $35 put for $2. Your max gain is smaller, only $1 because you spent money buying the lower put, but your max loss was also reduced.
Now if that stock drops to $30 or $20 you will not take such a large loss. You now have the right to buy the stock at $35. So if you get called out at $40 you will be able to sell it at $35, reducing your risk greatly. greatly reducing your risk.
Of course if the put expires then you just walk away with the profits.
Read useful tips in the sphere of forex market hours – make sure to study this publication. The times have come when proper information is truly within your reach, use this chance.
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