Selling a Put Option
What is Selling a Put Option?
Put option sellers, also known as writers, sell put options hoping that they become worthless when they expire. As a put seller, you have given someone else the right but not obligation to sell an underlying asset at a predetermined price up to a specific time in the future. It’s important to remember here that you are essentially giving someone else the right to sell to you an amount of an asset at a predetermined price so it can be costly for the writer (seller), especially if the underlying asset price falls sharply. Individual shares can fall very quickly, especially if the company announces a profit warning.
When selling puts with no intention of actually buying the stock, you want the puts to expire worthless. This option has a limited profit potential as the premium received is your maximum gain, but you have substantial potential risk if the stock goes down.
Some traders run this strategy as there is a high probability for success when selling very out-of-the-money puts.
A short put is a good way to get potential exposure to a market that you are interested in buying while taking in a premium. Some investors will sell a put with full intention to buy the stock if it reaches that lower level (strike price), effectively getting paid to place a “stop-in” order. In most cases, this is a very cost-effective way of gaining exposure to stock.
Short Put Summary
- Sell a put option
- Bullish to neutral stance
- The market to expire above the strike price of the option
- Falling volatility
- Time decay
- Alternative to buying the underlying asset
- Higher risk strategy
- Potential high loss if underlying asset goes to zero
- Can be exercised early if American style