Selling a Put Option

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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

CONFIGURATION:

  • Sell a put option

OUTLOOK:

  • Bullish to neutral stance

TARGET:

  • The market to expire above the strike price of the option

PROS:

  • Falling volatility
  • Time decay
  • Alternative to buying the underlying asset

CONS:

  • Higher risk strategy
  • Potential high loss if underlying asset goes to zero
  • Can be exercised early if American style

Important information: Derivative products are considerably higher risk and more complex than more conventional investments, come with a high risk of losing money rapidly due to leverage and are not, therefore, suitable for everyone. Our website offers information about trading in derivative products, but not personal advice. If you’re not sure whether trading in derivative products is right for you, you should contact an independent financial adviser. For more information, please read our Important Derivative Product Trading Notes.

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