Selling Put Option As A Option Trading Strategy:
Some option trading 101 first: Essentially, each option that is traded has a buyer (holder), and a seller, (writer). Criteria for writing put option includes view of the direction and a certain level of implied volatility. In particular, if a person was to write a option, he holds the view that the underlying stock is going to be 1. stable, 2. move up, and 3. move down slightly. For scenary 3, this is because the put option seller would be in a losing position once the underlying stock move below the strike price, which should be highligted here to add on to what is written on the article below. In the example below, the put option seller would be at a break even when the price comes down to $46 at expiry, and has to make a decision on whether he should still keep the underlying stock going forward.
In general, if the fundamental of the company remains sound, and one is willing to take a long term view towards ownership of the stock, this strategy would work for the investor. Enjoy:
Own Stocks at Zero Cost – Option Trading Secrets Revealed
Author: Sujoy Bhattacharya
It’s true – you can own your favorite stocks at no cost or at deepest discounts! Learn the highly guarded, secret option trading strategies professional investors use to make steady profits, year after year, no matter what the financial markets do. This article will show you the step-by-step process of using Options to get the stock you want at a deep discount, and sometimes at zero cost. Since trades don’t always go the way we planned, so we will also explore the worst case scenario.
Properly executed, these strategies have the advantage of minimal expenses – something everyone can appreciate during these troubled times. The following example will demonstrate how this is done.
- Do your fundamental analysis as you would do for any stock that you would like to buy and hold for long-term appreciation. Look for companies with strong financial and superior performance within their industry segment. Perhaps you’ve wanted to own the stock of a certain company for some time, but were not willing to pay the price.
- For those stocks, analyze Out-of-The-Money (OTM) Put Options with expiration dates between 30 to 60 days. An OTM Put Option is a Put Option with a strike price lesser than the current market price of the underlying stock. We are looking for a Put Option with high premium which we can sell.
- Sell the Put Option. Your trading account will get credited with the put premium amount. Example: XYZ Corp. (a fictitious name used for this example) stock has a current market price of $54 on July 1, 2009. August 2009 Put 50 is having a premium of $4. You sell 1 contract (100 shares) of August 2009 Put 50 to get a Credit of $400. If you had bought 100 shares then you had to pay $5,400 but now you are controlling the same number of shares and getting paid $400 for doing that!
Technical Tip: The seller of a Put Option is obligating himself to buy the stock at the striking price. For assuming this obligation, he receives the Put Option premium. For the more technical readers we have provided an in-depth article link at the bottom of this article.
On August 21, 2009, the day your August Put Option expires, two scenarios are possible: Either the stock price is greater than or equal to $50, or it is less than $50. Let’s evaluate both scenarios.
Scenario 1: The stock trades at $50 or above: in this
case the Put Option will expire worthless and you get to keep the $400 that you received earlier. You can now repeat the strategy month after month. When carefully executed, you would have earned around $7,200 in 18 months without ever paying a dime and without even owning the stock.
Let’s assume the share price for the stock has gone up 41% to $72 over the course of those 18 months. If you now purchase the 100 shares of XYZ Corp., the cost of ownership to you is ZERO, as you would have offset the $7,200 required for that purchase by your strategy earnings. You are now the proud owner of 100 shares XYZ Corp. at no cost to you.
Scenario 2: The stock trades below $50, say at $48 (a drop of 11% from $54). In this case the August Put Options will be In-The-Money (ITM) and now you need to buy 100 shares of XYZ Corp. at the strike price of $50. But here is the best part: You get to keep the $400 that you earned earlier selling the Put Option. Your effective cost for this trade is $4,600 after adjusting for $400.
Compare this with someone who bought 100 shares at $54. Share traders ended up with a loss of $600 while you had a modest profit of $200 instead. Well not as good as Scenario 1, but not bad either!
The strategy acts like a low-cost replacement for actual stock ownership, BUT you must be prepared to take ownership of the shares under Scenario 2 circumstances. Keep in mind that this is a long-term strategy.
There are many different ways to construct these strategies – conservatively or aggressively. Just like regular investing, different people have different levels of risk tolerance. If you want higher profits, you’ll have to be willing to take higher risks.
At TradeGreeks we avoid high risks that MIGHT hit the big jackpot. Our focus is on conservative strategies with medium to long-term consistent, predictable returns. This will ensure great profits that beat anything else you might try in this market – sometimes well over 100% per annum. What’s even more important:
Our strategies ensure peace of mind!
This is an article from the TradeGreeks’ “Tactical Series“
More in-depth explanations of this strategy can be found in our article “Uncovered Put Writing – Insider’s Guide“. We invite you to visit http://www.tradegreeks.com and register for free no obligation membership. This will allow you access to the article and many other educational resources regarding trading of Options.
About the author:
Sujoy Bhattacharya is the founder and CEO of TradeGreeks LLC. He holds a degree in Engineering with more that 14 years of large project and program management for multi million dollar projects for clients from varied domains including Finance, Manufacturing, Insurance, Business information industry. He has been actively trading stocks and options using fundamental and technical analysis in US and foreign markets for more than 10 years.