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The Beauty of Selling Put Options


  • pg 1
									The Beauty of Selling Put Options
Talk to any traders, they will most probably quote you that options
trading belongs to one of the riskiest type of trading. The mechanism of
option trading is complicated enough to put many investors off, not to
mention, taking a deeper perspective of what is beneath this mysterious
and yet feared world of option trading.
Like many investors, I started off my trading experience with shares, or
stock trading, conventionally thought of as the safest and easiest form
of trading until I was exposed to the wonderful world of options trading
a few years back. I have never looked back since then.
There are basically two types of options in options trading, the call
option and the put option. Basically, a seller of a call option has the
obligation to deliver 100 shares of the underlying once the option is
being exercised. On the other hand, a seller of a put option will have
100 shares of the underlying being put to him upon exercised of the
In options selling, the seller of the option, be it a call or a put
option, will have time working for him. He can make money if he is right,
of course, and also make money even if he is wrong! However, when he is
too wrong, then adjustment to his strategy will come in for the repair
and in most cases, will make that losing trade into a winning trade too!
I started out options trading using the covered call strategy, the most
conservative strategy that is believed to exist. As I explored more into
the options world, I discovered another strategy which I thought is more
powerful than the covered call strategy, at least that is my belief! That
is, selling put options.
Covered call on stock option and selling a put option against an
underlying will put the investor at the same amount of risk. If the stock
goes to zero, the covered call writer will bear the full risk of his
investment going to nil while the put option seller will also suffer the
same fate with his put option being exercised against him.
Selling a put option against an underlying gives one the opportunity to
possess the underlying at a price one is comfortable with and does not
mind holding on to. For example, for an underlying share 'A' trading at
$24 at this moment, I would sell a put option either in the current month
or next at says $22. Out front, I will be collecting the premium from the
sale of the put option. If the underlying price stays anywhere above $22,
the put option sold will expire worthless and I stand to pocket the
premium for free!
On the other hand, if the underlying drops to say $22, the put option
sold will still expire worthless. The break-even point is $22 - the
premium collected. However, if the share price drops to below $22, one
must be prepared to buy the underlying at a discounted price of $22.
Actually, the effective price you actually bought the 100 shares is $22 -
premium. Good deal right?
Two cases here: First, with the put option expiring worthless, we will do
the same thing again next month, selling put option against the
underlying. Second case, the option is being exercised and the shares
being put to us. The strategy of selling put option will be transformed
to a covered call strategy in which we now write or sell call option
against these 100 shares that we now owned.
I have found this strategy profitable, consistent and simple to use. Of
course, depending on one's appetite for profit margin and investing
habit, this strategy could be worth your consideration. Good luck!
uktank is the creator of the website,
which deals with options trading, specifically options selling.

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