Selling PUT Options Coming Off A Market Bottom

By Don Fanstone, Member, Kitchener-Waterloo User Group

With the market down significantly, at some point it will start its inevitable upward climb. VectorVest timing will tell us when. BE PATIENT!

When the turnaround occurs, it’s a good time to SELL PUT Options AS WELL AS BUYING CALL Options.

Selling PUTS on Optionable stocks incurs risk. If the underlying stock you sell PUTS on; happens to fall in price below the PUT STRIKE PRICE, you will be PUT-TO. Simply, you will be required to buy the stock at the strike price you sold the PUT at.

For this reason, it’s a good idea to sell PUTS on stocks that you would like to own at the strike price you use to sell the PUT.

It is not necessary to sell PUTS only on stocks you would like to own, just a consideration.

When you sell a PUT, you will receive income immediately into your account. You then have a liability to buy the underlying security if the stock price falls below the PUT Strike Price on the day of expiration, being the third Thursday in the strike price month.

By selling PUTS, you are in essence selling insurance to someone who does not want to hold a stock if it falls below the Strike Price. You will get paid well for selling insurance!

Considerations:

When a stock moves up and gets a BUY recommendation, it’s a good time to sell a Naked Put. You can sell At the Money, Out of the Money, or if you are aggressive you can sell In the Money PUTS.

You can also protect your loss position by purchasing a lower priced PUT, and thereby reducing your net trading gain.

Example:

Linamar:

Close Friday Jan 22,                                   $59.54

2015/6                                                          Low $55.12  HI $89.42

February Out of the Money:                   $58 PUT        $1.45 Bid      $1.79 Ask

February at the Money                            $60 PUT        $2.35 Bid      $2.65 Ask

February in the Money                             $62 PUT        $3.50 Bid      $3.85 Ask

Selling an Out of the Money February $58.00 PUT for a price of $1.60 would require you to buy the stock if PUT To at a Net price of $58 – $1.60 or $56.60.

With a SELL rating on the stock and the market being UP/Down, this would be a trade for aggressive investors.

When the stock achieves a HOLD rating in a Green Light Buyer situation, selling an out of the money PUT would be for prudent investors.

When the stock achieves a BUY rating in a Confirmed UP situation, selling an out of the money PUT would be for Conservative investors.

There are many considerations in selling PUTS, in a rising market this is a pure cash generator.

You need to have a margin account and agreement with your broker to trade options. No cost involved, just broker confirmation that you are set up to do this.

When you sell PUTS, you must have sufficient cash or other securities in your account to cover the trade if you are PUT To.

You cannot sell PUTS in a RIFF account!

Prospering in the markets favours the one who is prepared with trades to execute ahead of time.

In horse racing, you can bet to win, to show, or to place. If you want to win regularly, bet to place with PUTS, just a little further out of the money.

DISCLAIMER: Options trading involves risk and is not suitable for everyone. The information contained in this Blog is for education and information purposes only. Example trades should not be considered as recommendations. Options training is strongly recommended before placing any trades. VectorVest offers a basic options course online and occasional intermediate options workshops in Canada each year.