Selling Puts

Although a put may sound like a bearish scenario, this is not always the case. Whoever sells a put wants the price to end up above the strike price so that the buyer does not exercise the right. Remember that the seller of the put is selling the right for which he receives the premium, and therefore has the obligation to buy shares if the buyer of the contract wishes to do so. His strategy is to sell puts that close above the strike in order to keep the premium or a low price at which he is willing to buy the shares.

For example, you sell a put contract with strike 50 because this would be the price at which you are willing to buy the shares if you must. With a maturity of 1 month or less, because you want there to be little time for the buyer to fulfil his strategy. The contract is worth u$s2 per share, i.e. u$s200 that has been credited to your account. It can happen when the expiry date arrives:

1. The shares are above the strike:

The value of the shares is u$s52 and the contract expires without being exercised. The profit is the premium of u$s200. This strategy can be repeated.

2. The shares are below the strike:

The value of the shares is u$s47 and the contract is exercised, therefore it is mandatory to buy them at u$s50.

Premium income: $200

Potential loss for the value of the shares: 100×3=u$s300

It is a potential loss because you can actually wait for the shares to appreciate in value. In the example it is shown as if they were sold at the time they are worth $47 in the market.

Sell a Put Meaning

The strategy of selling puts is to buy shares at a lower, pre-fixed price than they are currently and also at a discount, so to speak, which would be the value of the premium. This is if you wish to buy them, but simply as premium income.

You have to bear in mind that many brokers require a certain amount of money tied up, which is usually 50% of the strike value, to ensure that if the contract is exercised you have the money. Therefore, this is something you should take into consideration, in addition to asking your broker what requirements they have for the sale of puts.

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