"Selling puts" comes from the options trading arena. Puts and calls are options contracts that Commerce against securities commensurate stocks, replace traded wealth and futures contracts. Options trading includes both the buying and selling of contracts.A trader buys deposit options in anticipation that the underlying security Testament decline in cost. As the underlying inventory falls below the assign strike fee, the situate choice starts to accretion in fee. Buying place contracts is a low-cost strategy to Income from falling security prices. The deposit seller receives a premium for selling the assign possibility contracts.
A deposit buyer has the licence to sell the underlying security at the strike expenditure to the deposit seller at any allotment up until the expiration generation. A buyer or holder of a situate possibility is said to be "great the possibility." A situate seller receives the premium for the Business agreement and must pay for the underlying security at the strike cost whether the Business agreement holder elects to manipulate the Business agreement. The lay seller is said to be "short the deposit preference."
Identification
A trader who sells levy alternative contracts is trying to achieve a particular trading ambition.
Function
A deposit choice is the due to sell an underlying security at a fix fee for a particular margin of extent. Settle alternative contracts are defined by the fee at which they can be exercised (besides called the strike expenditure), the expiration interval and the underlying security the Business agreement is written against. As long as the underlying security price stays above the contract strike price, the put seller has no loss and can keep the amount of premium received for the contract.Effects
Consider Apple Inc., symbol AAPL, which is selling for $246 per share. The put option with a strike price of $240 that expires in the next month has a price of $12.80. Each put contract is for 100 shares of the underlying stock, so the put seller would receive $1,280 for each contract sold. If AAPL stays above the $240 strike price until the expiration date, the put seller will get to keep the $1,280 premium received for selling the put. If AAPL drops below $240, the put seller may be obligated to buy 100 shares of AAPL at $240 per share---$24,000 in total---or buy an offsetting put contract at a higher price.
Potential
The goal of a put selling strategy is to sell put options on securities that do not fall in value and keep the premiums from the options sold. It is an income generation strategy, which allows the trader To gather money and keep it if the strategy works. The put seller believes the security price will stay above the strike price of the option, while the put buyer is betting the price will fall below the strike price. The risk of put selling is that if the underlying security falls rapidly in value, the trader will generate losses much larger than the premium earned by selling the options. Selling puts is a strategy of earning small premiums over and over, with the risk of a very large loss if a trade goes the wrong way.
Considerations
Put sellers are not allowed to sell put contracts and collect the premium without putting up cash or collateral to protect the trade against loss. An account approved for cash-secured put selling requires the trader To possess enough cash in the brokerage account to cover the cost of the stock if the contract is exercised. Traders who are allowed to sell naked puts---puts without the cash to back them---must put up margin deposits of 15 to 20 percent of the value of the stock if the contract is exercised. Naked put selling is only allowed in the accounts of experienced traders, and most brokers require an account value of $100,000 or more.
