If you sell a put 40% out of the money and the stock falls 35% by expiration, then you still win all your premium. And, since you only begin to see losses if the stock price drops below the strike, then having a big cushion means you can be wrong about the near-term price action and still be profitable with your short put. But if you are way out of the money, then you would have a cushion between the strike price and the stock price. Sure, if you're selling puts close to the money, then you need to guess right, because if the price moves against you, you will see losses. In fact, you don't have to guess accurately about price movement to avoid losses. ( ) We disagree with this description of writing putsįirst, selling a put does not "require" a neutral to bullish forecast. When cash-secured puts are sold it is assumed that the investor is willing to buy the underlying stock. However, since sellers of cash-secured puts are generally willing to buy the underlying shares, the possibility of early assignment should not be of great concern. Therefore, the risk of early assignment is a real risk that must be considered. Stock options in the United States can be exercised on any business day, and the holder of a short option position has no control over when they will be required to fulfill the obligation. If the stock price remains unchanged or rises, then the price of the put will decline. Selling a cash-secured put requires a neutral-to-bullish forecast. Here's an example of these myths in action from : Short puts are risky because options are risky.
You should have a neutral to bullish outlook on the stock.Enter short puts on stocks you wouldn't mind owning.We apply this concept to options trading, and you can read more about that in our gambler's post here.īelow are the common short put myths that we read often: Expected Value is a mathematical concept used by gamblers to determine whether a bet is worthwhile. That is not to say it is wrong to follow the herd, but we feel it is incomplete and teaches away from selling puts in a manner that provides a better Expected Value.
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Myths about selling cash-secured putsĪs with covered calls, there is a lot of advice out there on how to sell puts "correctly." We have found that this "correct" approach often leads to sub-optimal set-ups. We hope this helps you find better options set-ups and improves your trading. As before, we will discuss the conventional myths in more detail, provide some justification of our criticism and of our new method, and also give you a tool to use with our unusual trading style. In this third article in the series, we focus on short puts, specifically cash-secured puts. We followed-up with a discussion of covered calls. In our original article on busting options myths, we described four myths bandied about options that we think are misleading and/or suboptimal.
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