How to Sell Puts; Let’s look at Two Strategies
This strategy is used when does not mind owning the stock. If the stock trades at or below the strike price of the puts you sold, the stock could be put to your account. Therefore you should have enough funds to cover the total number of shares you would have to purchase if the option holder pushed you to purchase the stock.
Let’s Look At An Example
Purchase SMG when it trades to 70 or better; the current price is 76.00. A trader has two options:
The easier and potentially more effective choice is to wait for the stock to trade close to the suggested target. When the stock is trading at 70 or better, one would look up the price of an option with a time premium ranging from a few weeks to three months. In this example, we are going to target an option with roughly three months of time premium, the June 70 puts and the Bid-ask price is 2.60-2.90. one could place a limit order at half-point which would 2.75 (half the spread of 30 cents) and wait. If filled you would receive $275 per contract. Should the stock trade at or below 70, the shares could be put to your account.
If the shares are put to your account, your final price would drop to 67.25, but everyone else that did not sell puts would pay 70 dollars. If the shares are not put to your account you would, in essence, get paid for putting in a limit order. Having said that please do not get cocky and sell more puts that can you could handle. One should sell the equivalent of the shares they are willing to purchase. So if the first 1/3rd of your funds could purchase 300 shares, then one should not sell more than 3 contracts.
The Second Strategy
This is for traders who want to act right away, but before we continue we would like to state that the first strategy is easier to implement if you have a few extra minutes to spare every day to monitor the price of the stock. We are going to use the same data as above.
We are still targetting the June 2019, 70 puts. One would, therefore, look at the current price of the June 2019, 75 puts as they are trading as that is what the price of the June 70 puts will be roughly when the SMG drops to 70 or better. However, as the stock is currently trading above $76.00, one would subtract roughly 1 dollar as the puts are $1 dollar in the money and use that info to place a limit order to sell the June 2019, 75 puts.
The actual amount you subtract could range from (70 cents to 1.00). Let’s assume they are trading at 3.50, so after subtracting the stated amount, one would arrive at a price ranging from 2.50-2.80. This is a very simplistic overview of the process and one method that is more accurate is using a Black Scholes Calculator.
Now the trader would put in an order to sell the June 70 puts at price ranging from 2.50-2.80. You would receive between $250-280 per contract. Now let’s assume the shares are put to your account, your final price would be the cost of the shares minus the premium you received, which in this case would work out to be an entry price that would range from 67.20-67.50 per share.
Other Articles to Read
Important Information To Read Before Getting Into Options
Tactical Investor Trading Suggestions
Portfolio management process; Ideas On Becoming A Better Trader
