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How to Sell Put Options

How to Sell Put Options for Beginners

7 min read

Did you know selling put options is a great way to generate income? Note that I said sell put options contracts, not buy them! The reality is that you can use this strategy to generate a consistent income flow.

I look forward to the 3rd week of every month when my put options expire worthless. Yes, you heard right, worthless. And no, I’m not crazy.

Do you want to know how to sell put options that earn you at least 1% of your portfolio value? I’ll take that as YES. So, without further ado, here are some reasons I love selling put options.

  1. Here’s how to sell put options:
  2. Log into broker
  3. Click on the trade tab
  4. Go to the put chart
  5. Click on sell instead of buy

Let’s start with the basics before we learn how to sell put options contracts. What are the options?

​They give you the right but not the obligation to buy or sell a stock at a certain price within a certain amount of time. One contract controls 100 shares.

As a result, you can trade large-cap stocks without putting out the capital. That’s a fantastic way to grow a small account without going into penny stocks

Options have a lot of moving parts that affect profit and loss. Learning how to sell put options means learning how those different parts work.

Does time hurt you or help you? How does implied volatility work in your favor? What about the rest of the Greeks?

How to Sell Put Options Example

You Can Be Wrong

It sounds like half the decisions I’ve made in my life. Regardless, no one can be perfect all the time, and better yet, you don’t have to be 100% right on an options trade to make money if you know how to sell put options.

Let’s take Intel ($INTC) as an example. You think the price has hit bottom, so you buy it today at \$22 a share with the hope that the price goes up shortly so you can sell and make money—a quite simple concept – buy low, sell high, no explanation necessary.

The problem is that you’ve tied up your capital, and at $22 a share, that could mean a lot of capital. Now comes the second problem: you’re at the mercy of the tides of the market.

And we all know how picky they can be. You hope you bought the dip and the price won’t drop another 10%, for example.

Unfortunately, if it does drop, you cannot sell at a loss because you are a wise trader and follow proper risk management strategies.

On the other hand, if you sold a January 2019 \$20 put option for \$0.40 a contract, your effective entry price is \$19.60. Because of this, you now have a 10% downside protection until January 19th, 2019.

Even if your analysis was completely left of center and the stock tanks to \$18, you’re okay. This is because you can always roll forward and down your put option to April 2019 and still profit from the trade.

Be Lazy

Do I have your attention yet? Once you’ve entered the position, you don’t need to do too much. Other than checking the underlying stock price once or twice daily, you can hit the beach or gym or do what your heart desires.

You can sit back and let time do all the work most of the time. Thank time decay for this, as it will gradually decrease the value of the put option.

When enough time has passed, or the market has moved in your favor, you buy back your put contract and free up your capital. Then, you use your capital by selling put contracts on another stock.

This rinse-and-repeat cycle can be done over and over. Knowing how to sell put options makes you a little wrong on a direction.

You can test this out using our real-time stock alerts. Practice how to sell put options contracts and see how it works. 

COURSE
Day Trading Course Options Trading Course Futures Trading Course
DESCRIPTION Learn how to read penny stock charts, premarket preparation, target buy and sell zones, scan for stocks to trade, and get ready for live day trading action
Learn how to buy and sell options, assignment options, implement vertical spreads, and the most popular strategies, and prepare for live options trading How to read futures charts, margin requirements, learn the COT report, indicators, and the most popular trading strategies, and prepare for live futures trading
INCLUDED

Is Selling Puts Safe?

Is selling puts safe? Selling a put means that you’re bullish on the stock. Buying a call is the inverse strategy. Being an options seller puts the trading odds more in your favor. Selling naked puts is still risky and safest when turning it into a credit spread. But make sure you know how to sell put options contracts.

I love short selling, and to be quite honest, I look forward to the days when the market drops 1-2%. Watching stocks tank due to panic selling, “fear,” should have you clicking your heels like Dorothy from the Wizard of Oz.

This is the best time to sell put options since volatility (a.k.a panic) is at its highest. Don’t forget that selling puts is a bullish strategy. Therefore, you want to sell puts knowing the stock is going up.

This is how you capitalize on fear. Firstly, scroll through your watch list to find oversold stocks (i.e., selling off). Secondly, sell puts with a strike price near a support level.

As emotions calm down over the next few days, volatility follows; thus, the market will gain equilibrium again. As a result, you will be left with a small gain in your position. Nice!

Check out our live trading room to see us show how to sell and put options contracts in action.

Using Margin

I won’t encourage you to use margin if you’re not a seasoned trader. There’s nothing like a margin call from your broker to induce a mild heart attack. Especially if you’re learning how to sell put options contracts.

If you want to get into the game of selling put options, you must put up some cash as margin. And how much depends on the underlying price of the security and option.

Typically, it’s capped at the strike price * 100 per contract (because each contract has 100 shares). So, if you sold one $20 put option, the cash you have to front is $2,000 ($20 * 100).

Tip on How to Sell Put Options

If you didn’t know, in some instances, around 30% of your equity value is added to your initial and maintenance margin. This means you can only use 70% of the market value to counterbalance the margin requirements of your put options.

If the market quickly turns against you, having 30% of your margin amount in cash would be wise. This will prevent the dreaded margin call from your broker.

Selling naked or uncovered puts is not a low-risk strategy for the faint of heart. This is because you’re selling put options without holding a short position in the underlying security.

Realistically, however, if you’re a seller of options, you will likely repurchase them well before the underlying security price falls too far below the strike price.

This can easily be accomplished by checking prices daily, setting stop-losses, and setting alerts to notify you when this happens.

Final Thoughts: How to Sell Put Options

Now you know how to sell put options contracts. Because of the high risk involved, only experienced options investors should sell naked puts. Luckily, though, there are lots of different covered put options you can utilize to protect yourself from the changing tides of the market. ​

If you need more help, take our options trading course.

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