Selling Put Options is very profitable
Selling Put options is not the first trade starting investors will do. Yet in this bull market it is a very profitable one and it has a high probability of success. Most beginning options traders start with buying call options. Buying call options and selling put options positions will be used to profit in a bull market.
Writing an option is a different way of to express that you want to sell an option. Traders that sell a put option will receive option premium. When you sell an option you take on the risk that you have the buy stocks for the price of the strikeprice. Since you will sell options with a strike price above the current market price you do not have to buy the stocks. Below you will see a profit / loss graph.
Traders that sell options want to sell options with a lot of option premium. These expensive options have a high Implied Volatility. Usually options does not have a high IV for a long period. Especially when the stock moves up Implied Volatility declines.
Example of Selling Put Options
it’s time to take a look at why this is a superb income-generating strategy. Let’s say Microsoft is getting stocks is beaten up because the whole market sector went down. Stocks that dip will have increased Volatility. We expect that the company is stable enough to bounce back.
So you are bullish. This is a perfect time to sell puts on the company. Because of the incertainty in the market the options Increased in Volatilty and the options becomes more expensive.If you want to sell puts you go to your trading platform and go to the puts and click on the ASK price.
When we sell a put option contract, we take on the obligation to buy the stock at an agreed upon price. The broker ties up some of your capital as part of the option trade.
In some cases the seller want to exercise his right to exercise the options. In that case you have to buy the stocks. And because you received an option premium at the time you sold it you got the stocks with a discount. Well, now we own shares of a solid dividend-paying company that we can sell an ITM call option and receive option premium again. Or close the trade by selling the shares.
Our expectations is that an underlying stock will rise and Implied Volatility (IV) will drop. When IV drops the options price will go down. As soon as we can buy the option back with a 25-50% profit we close the trade. Then you can enter a new trade. Why do we manage that trade so early? Because the stock price or IV might turn in a different direction.
If you do not like to to trade naked options or do not like trading with (un)limited risk consider defined risk trades.
High Probability trade
Traders that sell put options you will receive option premium. You have moved the odds in your favour. You have a much high probability of profit now. The breakeven price is now lower than the strike price of the options. The stock price can go up, remains the same of goes down a little bit and you still can make money.