Sell put option example

For example, if the stock fell from $40 to $20, a put seller would have a net loss of $1,700, or the $2,000 value of the option minus the $300 premium received. But done prudently, selling puts can be an effective strategy to generate cash, especially on stocks that you wouldn't mind owning if they fell.

What happens if I sell a put option?

Selling a put option allows you to collect a premium from the put buyer. Regardless of what happens later on in the trade, as the put seller, you always get to keep the premium that is paid up front.

Why would you sell a put option?

Selling puts generates immediate portfolio income to the seller, who keeps the premium if the sold put is not exercised by the counterparty and it expires out of the money. An investor who sells put options in securities that they want to own anyway will increase their chances of being profitable.

When should you sell puts?

In order to receive a desirable premium, a time frame to shoot for when selling the put is anywhere from 30-45 days from expiration. This will enable you to take advantage of accelerating time decay on the option's price as expiration approaches and hopefully provide enough premium to be worth your while.

How much money do you need to sell puts?

The average size of a recommended trade is about $6,000, and they range from $4,000 to $10,000. Because you have to buy at least 100 shares, or have cash set aside with your broker to buy it in the case of selling puts, you're looking at committing at least $5,000 to any stock that trades for $50 per share and above.