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Options Trading Strategy:
Selling Put Options

There are several options trading strategies to satisfy the demand of the bullish mood. If a trader feels that the market is in an upward trend and not likely to go down, then the Selling Puts Option Trading Strategy can be considered. With this trading strategy, an options trader would sell puts on a quality asset which the trader wishes to own at a discount.

When a trader sells puts he sells the right to sell the underlying asset at a fixed price (the strike price), on or before the expiration date of the option. In other words this trader guarantees that he will buy the stocks (assets) later at specified price. Of course if the stock price goes up, there will be no-one willing to sell it at a cheaper price and the options put seller will keep the premium for the sold puts as profit. However, if the underlying stock drops in price, a put seller will be obligated to buy this stock at a specified price and in this case an options put seller will experience losses.

Benefits of this options trading strategy:

  • The puts will not be exercised and a trader keeps the premium as profit if the asset price is above the exercise price at expiration.
  • A put seller may at any time buy puts back to cover a short position and keep the difference in the premium as profit.
  • The time decay of the option works in favor of the put seller. The time-value portion of the put premium constantly declines with time going to zero on the expiration date.

On the other hand selling options short is considered one of the riskiest types of investments since a trader could have limited (max 100%) profit and theoretically unlimited losses. Covering the risks of this options trading strategy is very important. As a rule, each broker has margin requirements on selling options for insurance against a decrease in the price of the underlying asset.

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The Information on the Site is provided for information purposes only. The Information is not intended to be and does not constitute financial advice or any other advice. The trading of stocks, futures, commodities, index futures or any other securities has potential rewards, and it also has potential risks involved. Trading may not be suitable for all users of this Website. Past performance is not necessarily an indication of future performance. You absolutely must make your own decisions before acting on any information obtained from this Website.

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