What if you could buy stocks lower than the current market price? If either of those scenarios sounds appealing to you, then perhaps you should consider selling a cash-secured put.
But selling a cash-secured put gives you another method of buying the stock below the current market price, with the added benefit of receiving the premium from the sale of the put. Sell an out-of-the-money put strike price below the stock price. In order to receive a desirable premium, a time frame to shoot for when selling the put is anywhere from days from expiration. This will enable you to take advantage of accelerating time decay on the option's price as expiration approaches and hopefully provide enough premium to be worth your while.
But what you consider a good return is up to you. Ideally, you want the stock price to dip slightly below the strike price, and stay there until expiration. The premium received from selling the put can be applied to the cost of the shares, ultimately lowering the cost basis of the stock purchase. This is a great scenario. The bad news is you were wrong about the short-term movement of the stock.
Plus, the cash you used to secure your put will be available to you for other trades. But look at the bright side. That would be worse, right? Plus, now that you own the stock, it might make a rebound. This is obviously the worst-case scenario. But what if the stock does completely tank? There are a couple of things you can do. If you doubt the stock will make a recovery, your other choice is to close your position prior to expiration. That will remove any obligation you have to buy the stock.
To close your position, simply buy back the strike put. Keep in mind, the further the stock price goes down, the more expensive that will be. This scenario demonstrates the importance of having a stop-loss plan in place. This is much the same concept as a stop order you might have on stocks in your portfolio. Selling cash-secured puts is a substitute for placing a limit order on a stock you wish to own.
You receive a premium for selling the puts, and if the options are assigned, the premium can be applied to the purchase of the stock. Just remember, only sell puts on the number of shares you can reasonably afford to buy. And have a stop-loss plan in place, in case the stock goes completely in the tank.
Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options.
Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve additional risks , and may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point.
The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract.
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The Options Playbook Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between. Selling cash-secured puts on Stock you want to buy What if you could buy stocks lower than the current market price? How to do it Sell an out-of-the-money put strike price below the stock price.
How might this trade pan out? The stock completely tanks This is obviously the worst-case scenario. The recap on the logic Selling cash-secured puts is a substitute for placing a limit order on a stock you wish to own. Back to the top.More...