put options confusion

alanj answered 4 months ago …

rvilmur gave a good answer. However, part of your statement needs further explanation, which rvilmur did not address. The statement is the following- "if the stock price is above the STRIKE PRICE of your option then you can keep the premium meaning you wont lose anything". While this is true, you get to keep the premium whether the stock price is above or below the strike price. You get to keep the premium no matter what the stock price does. When selling puts to open the trade, and the stock price goes below the strike price (depending on how far below the strike price) you could end up losing more than the premium that you received. In fact it could be a whole lot more. You could end up losing thousands of dollars for each contract you sell. History tells us that most options you sell will end a winner. But the risk is if you end up losing you could wipe out all your winnings. Because, the premiums you will receive is small compared to the amount you will be risking if you lose. If you are considering selling puts I would recommend two things. Using a stop loss and make sure that the put is a covered put. In other words for every contract you sell you need to own or purchase 100 shares of the underlying stock. In the case of the stop loss when the stop is hit you would be buying a put at the same or close to the same strike price of the put you sold. They would be cancelling each other out. You would have some time value loss, should be a max of the premium you would pay for the option.
In todays current market I'd think twice before selling puts. Overall, we are in a bear market. The up trend since March is a bear market rally, which has come to an end. The market is heading for the March lows. And most stocks will follow the market. If you sell puts now, chances are you will end up a loser. If you want to sell options I would recommend selling covered calls during a bear market. But, wait until the underlying stock is over bought (price has gone up) and is now starting to head down. You will lose value in the underlying stock, but don't sell the stock after the option expires. Keep selling calls after each option expires using stop losses. Historically, most good stocks will go on to new highs. So when the stock goes back up to where it was when you first started to sell calls the stock would be even. No loss, no gain. But the calls you would have been selling along the way would be your gain.