Options Trading Strategy:
Selling Put Options
There are several
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
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
- 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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