Selling Puts!!

Welcome to Selling Puts, where you will be taught:

--The obligations involved with selling puts
--The profit and risk potential of selling puts
--How and why a conservative investor might sell puts
--How and why an aggressive trader might sell puts
--Trading considerations when selling puts

Selling Puts - The Obligations Involved

--Put buyers have the right to sell the underlying stock.
--Put sellers are obligated to buy the underlying stock if the put buyer decides to exercise the right to sell.
--Put sellers must be financially and psychologically prepared to buy the underlying stock.

Selling Puts - Profit and Risk Potential
Example: XYZ stock @ $71.25
Sell 1 XYZ April 70 Put @ 3.5

If the put buyer exercises, the put seller must buy the underlying stock and assume all of the related risks.

At expiration: put expires and premium is kept as income.

Note: Put sellers must make a margin deposit.
The potential risk is usually larger than the margin deposit.

Selling Puts - The Conservative Investor
Conservative Carl has the cash to buy 100 shares of XYZ stock at $71.25 per share, its current price.

But Conservative Carl predicts that XYZ will trade lower in the short term and that XYZ can be purchased at a price below $70.

Strategy: Conservative Carl sells 1 XYZ April 70 Put @ 3.5 and deposits $7,000 in a money market account.

If the forecast is right, XYZ trades below $70, the put buyer exercises the put and Conservative Carl buys the stock. Effective purchase price = $70 - $3.50 = $66.50.

If the forecast is wrong, XYZ trades higher and the XYZ April 70 Put expires and Conservative Carl keeps the $3.50 per share premium received.

Selling Puts - The Aggressive Trader
Aggressive Amy believes that XYZ stock, currently $71.25, will trade between $70 and $75 until the option expires.

Strategy: Aggressive Amy sells 1 XYZ April 70 Put @ 3.5 and maintains the minimum margin deposit required by her firm.

If the forecast is right, XYZ stays above $70, and the XYZ April 70 Put decreases in value with the passage of time. If it expires worthless, Aggressive Amy can keep the full premium as income.

If the forecast is wrong and XYZ declines below $70, then Aggressive Amy may be forced to repurchase the XYZ April 70 Put at a loss or may be forced to buy 100 shares at 70. The loss could be substantially greater than the initial margin deposit.

Put Selling - Trading Considerations
Selling puts has limited profit potential for Aggressive Amy. For Conservative Carl it is a good way to acquire a stock at a specific price if the near term market forecast is bearish while the long term forecast remains bullish.

"I think the stock price can be purchased at a price below $70."

Put selling may be appropriate for the conservative investor when this is the objective.

"I think the stock price will close above $70 on expiration."

Put selling may be appropriate for the aggressive trader when this is the forecast.

If assigned, a put seller must be willing and able to purchase the stock at a price significantly higher than the current market price.