When you sell a put, you might be bullish. Weird right? All you see here is people buying puts long and selling them (to close the trade) when the stock moves down. But this is different. This is a strategy that options traders use to collect premium (aka money!). You are selling puts to the buyer of an option because you believe the stock price will rise while the buyer believes it is going down. The trading odds are in your favor as a seller. However, there’s almost unlimited risk in being a naked seller of a put. The price can’t fall below zero. The safest way to be an options seller is with spreads.
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What Does It Mean to Sell a Put?
Selling a put means selling someone the right but not the obligation to have you buy 100 shares of a company at a specific price before an agreed-upon date. Buying calls and puts is routine, but do you know how to sell a put? The great thing about options is the fact that they give you options.
Options can be overwhelming and even scary to new stock market traders. However, when you take the time to learn stock training, it doesn’t have to be overwhelming.
Options give you the right but not the obligation to buy and sell stocks at a certain price within a certain time. One contract controls 100 shares. As a result, they’re cheaper than trading stocks.
You’re paying the premium to control stocks without actually having to own them. However, you can use options trading to, in fact, end up with the actual shares at the price you bought the premium for.
A stock option can be used to hedge and for speculation. They have many uses, such as the ability to sell a put, which makes them appealing to new and seasoned traders alike.
This is an example of selling puts in the ThinkorSwim platform.
Buying vs Selling
Buying puts is what most traders are familiar with, especially new traders. It’s a great alternative to short selling. There are a lot of brokers without great short-selling ability.
Hence, the attractiveness of options. Buying a put takes a short position. You believe that the stock is going to go down in price. You sell the put for a profit once the price has fallen.
If the price rises instead, then you take a loss. In other words, buying puts allows you to take a short position. Again, because of the inexpensiveness of options, you can short the large-cap stocks.
Don’t forget you control 100 shares. That adds up and can be quite lucrative. Why would you sell a put?
When selling a put, you’re taking the bullish side of the trade. That might sound confusing since puts are seen as bearish. However, when you sell a put, you want the price to increase.
Why? Because you want to make money. Selling puts is the opposite of buying. As a result, selling takes the bullish side.
Why Should I Sell a Put?
Does knowing how to sell a put benefit traders in any way? The answer is yes. It offers some unique opportunities.
For example, when you sell a put, you’re gaining bullish exposure and the ability to own the shares at well below market value.
In other words, you can sell a put and buy the actual shares at a less expensive price. That may sound a little wild or even like a scam.
However, it’s not. It’s the reason people will spend money on options trading services and courses. You can protect yourself in a crazy market. However, options are risky.
There are many moving parts, like time decay, implied volatility, and open interest. All of that, plus more, affects the profit and loss of options. Hence, strategies like selling put options.
It’s important to remember that you’d have to assume the obligation to buy the shares if the buyer decides to sell their position. Make sure you have the money in your account should that happen.
So that you know, the majority of options expire worthless. So, it’s very rare that you’d be on the hook for buying the shares.
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Practice in a Simulated Account
Since options have so many moving parts to them, you’re going to want to practice trading them in a simulated account. ThinkorSwim by TD Ameritrade is one of our favorites.
With a paper trading account, you can place hundreds of practice trades before using real money. As a result, you can work out the kinks and see what options trading entails.
Trading is emotional as well. As a result, practicing allows you to learn to control those emotions. However, we realize that once you go live, it’s a whole different animal.
Losing money when practicing is much less risky than going full throttle out of the gate. It protects you as well as you learn how to sell puts.
What to Look for When You Sell a Put
- You’re taking the bullish bias when you sell puts. As a result, you need to know when a stock will reverse from the downside.
- How can you find that out? By looking at candlesticks and patterns along with support and resistance. If you want to sell, look to sell when it can’t break support.
- Once it returns to resistance, you’re in the green while someone else is in the red. That might sound harsh. However, that’s the nature of stock trading.
- The stock market is a battle of buyers and sellers. It’s what moves the market. Without that battle, there’s be no price action. Without price action, no one would make any money.
- Candlesticks are the foundation of trading. Without candlesticks, technical analysis means nothing. By themselves, candlesticks tell a story. However, group them, and you’ve got patterns.
- These patterns, coupled with technical analysis and support and resistance, will give you a pretty clear picture of the type of trade you should be making.
- Remember that even the best traders fail 30-40% of the time. You may not hit it out of the park every time, but if you trade the setups, you’ll do well.
Bottom Line
When you sell a put, you’re taking a bullish bias on the trade. As a result, you’re doing the opposite of what you’re used to when buying calls and puts because you are short instead of long. That may take some time to get used to. Hence, you must practice in a paper trading account before even dreaming about doing it live.
If you need more help, take our options trading course.
Frequently Asked Questions
The biggest risk of selling put options is that traders are obligated to purchase the stock and the exercised strike price, even if the stock price falls to zero.
Selling a put is a bullish options trade. It's a naked selling strategy where a trader wants to profit on the underlying stock going up.
Writing a put option means that the person sold the put option to the buyer and has to purchase the stock at the strike price if exercised.
