- Selling Covered Puts | Covered Put Strategy | PowerOptions
- Put Selling Is Superior To Covered Calls
- How to Write Covered Puts
The exact opposite view is taken when you sell a call or put option. Most important, when you sell an option you are taking on an obligation not a right. Once you sell an option, you are committing to honoring your position if indeed the buyer of the option you sold to decides to exercise. Here's a summary breakdown of buying versus selling options.
Selling Covered Puts | Covered Put Strategy | PowerOptions
The key here is the cash-secured put investor's intent to acquire the underlying stock regardless of the near-term lows it might hit. So as long as the put writer is comfortable with assignment and the downside risks of the stock, this strategy isn't inherently more dangerous than a covered call. Of course the risk is large if the stock is falls to zero. However, that risk applies to all stock owners and covered call writers, too.
Put Selling Is Superior To Covered Calls
None. Since the goal of this strategy is to acquire stock, the investor should welcome an assignment at the option's expiration.
How to Write Covered Puts
If sold options expire worthless, the seller gets to keep the money received for selling them. However, selling options is slightly more complex than buying options, and can involve additional risk. Here is a look at how to sell options, and some strategies that involve selling calls and puts.
"Assignment" happens via a random lottery system run by the Options Clearing Corporation (OCC). When the OCC receives an exercise notice, it’s assigned randomly to a member clearing firm. In turn, your brokerage firm randomly assigns exercise notices to short options positions on their books. So it’s possible you’ll be assigned through this process.
The incorporation of options into all types of investment strategies has quickly grown in popularity among individual investors. For beginner traders , one of the main questions that arises is why traders would wish to sell options rather than to buy them. The selling of options confuses many investors because the obligations, risks and payoffs involved are different from those of the standard long option.
The most that you can make on a covered put position is the difference between the option strike price and the price that you shorted the stock, plus any premium received. This occurs if the stock declines to a price less than or equal to the put strike price, in which case the option is exercised and you purchase the stock at the strike price and cover your short position.
If you like Company A's future prospects, you could buy 655 shares for $77,555 (ignoring commissions for simplicity). As an alternative you could sell one Jan $755 put option expiring two years from now for $85 today. Since one option covers 655 shares, you will collect $8,555 in option premium , less commission. The terms of this specific put option are that it expires on the third Friday of January two years from now, and has an exercise price of $755.
If you’re more of a do-it-yourselfer, here’s an example of how you can calculate the different returns including commissions and fees. (These numbers assume you are trading a buy-write and use the cost basis of $55 for the stock.)