Selling Puts - Bullish Options Trading Strategy
Selling a put is very similar to a covered call, only with a slightly different perspective. When you write a covered call you are speculating that the stock will go up or stay the same. With a covered call, you must own the stock, so your risk is losing money to a falling stock. In order to make money with a covered call, you need for the stock to go up, or even sideways. Learning the technique of selling puts is a valuable step in becoming a successful trader.
Selling a put, however, does not require you to own the stock in advance. This is the beauty of playing the stock market by selling puts. You can sell puts on margin; although it is necessary to research the margin requirements carefully. For put selling, margin requirements vary from broker to broker. When you sell puts, the "premium" collected for the trade is deposited into your account on the day your trade is entered into.
There are a number of different reasons why you might want to sell a put on a stock. As mentioned earlier, with a covered call, it is necessary for the stock to go up or sideways to realize a profit. When selling a put, it is possible to make money investing in stock several different ways, including when the stock is going down.
These ways are:
- If the stock goes up, your put expires and you earn the premium.
- If the stock stays flat, your put would also expire, leaving you to earn the premium.
- If the stock drops less than the difference of the selling price and the put, you would again earn the premium.
- If the stock shows a weakness that you consider temporary, you can “buy back with a roll out”. This means that you buy back your option, and then sell the put for the next month. This essentially buys you extra time for your stock to move positively. The entire process would move out one month and the same parameters. This is a key benefit in being able to perform stock technical analysis. By learning how to read stock charts, an investor is better able to predict unfavorable movements in a stock and react.
- Finally, you can use marginable stocks in your portfolio to sell puts on additional stock which you can purchase below the current market price.
Once again, while there are a number of ways to earn money selling puts, and two primary ways to lose money. First, if you hold a weak stock past its strike price and sell, you actually create a situation where you lose on your investment. Second, is that someone will “put” the stock to you at the put price. If your stock drops below the put price, minus premium, and someone puts the stock to you, you will lose money. This can be avoided with a “buy back with a roll out” or a simple buy back on your option. As you might expect, a sound investor takes care to close positions before being put to minimize the risk; this is a basic concept of learning to invest in the stock market.
Selling puts is a great way to accumulate stocks for a discounted price. This is a strategy that can potentially be used with your IRA to form a plan for long term investing. Many IRA underwriting companies may not allow you to do this; the IRS and SEC have deemed such a practice to be a suitable way to invest in your IRA.