3 WAYS TO PROFIT FROM SELLING PUTS
I often receive questions about how to properly sell puts, what the risks are, how much money can I make, etc. The truth of the matter is, selling puts is a very risky strategy if you don’t have a plan.
The idea of acquiring stock through selling puts is not new. Many traders have utilized this strategy for income as well as building into long stock positions. Here are a few ways you can become profitable and stay out of trouble.
1. Always have one goal in mind: Reduce cost basis. If I went out and bought 100 shares of XYZ stock at $10.00 per share and then sold a 5.00 strike put for $1.00, I should be thrilled to own another 100 shares of XYZ stock at a cost basis of $4.00 per share (strike price of the put, minus the $1.00 of premium you collected for the sale of the put).
This is tricky though, because what happens if the stock falls too fast and I’m underwater too much on the put I’ve sold? Well, here’s where you need to know about adjustments.
2. Making adjustments to my short put position simply means “rolling” it down to a lower strike price, or out farther in time, or both. Example: If I sold a 5 strike put for $1.00 and it quickly went against me and went up to $2.00, I could simply close it out and re-sell another put which is lower in strike and further out in time for the $2.00 I need to make back. This is a simple way to make a rolling adjustment, but it does require some skill as when to know the time to roll (try look at support lines going back a few months for a guide).
3. What happens when you don’t get assigned the stock, or you don’t have to make adjustments to your position? YOU COLLECT THE PREMIUM OF COURSE! This is the bread-and-butter of the strategy – you collect a sweet income on all the puts you have sold and the premium (profit) goes straight into your account by expiration).
Hope this helps!