Options trading is skyrocketing in popularity since it has proven to be an excellent way to boost investors’ income. While many traders are familiar with call options, it is also important to be well-versed about put options to make the best trading decisions when it comes to options trading. As a newbie, you can either buy or sell put options. In this guide, we will help you understand what selling put options is, its benefits, and the risks that come with this type of investment.
In This Article
Selling Put Options Guide for Beginners
What is Selling Put Options
When selling put options, investors get into an agreement or contract to buy a certain asset at a predetermined price. Here, you are obligated to make the purchase at a strike price from an option buyer if they exercise the option. Note that with put options, you will earn profits if an asset’s value increases or remains the same since the buyer of an option won’t exercise the option. However, you will incur losses should the asset’s value decrease. Overall, put options sellers get to collect premiums from put buyers. Plus, they get to keep the premium paid upfront.
Major Elements to Note in Selling Put Options
If you are new to put options, there are basic elements to note to help you fully understand how this investment strategy works. Take a look below at some of the basic ones.
- Strike Price: This is the price in put options at which you can sell an underlying stock
- Expiration: The agreed period at which an option expires and is considered worthless
- Premium: The price at which an option is set for buying and selling
- Naked Put: This is whereby investors sell a put unhedged. Keep in mind that this strategy is covered by margin and not cash
In most cases, an option contract can be in the form of stock or indices. One option is a contract representing 100 shares of an underlying stock. You do not need to own the underlying stock to sell a put.
How to Sell Put Options Using a Broker
Whether you intend to generate weekly or monthly income, you need collateral in the form of cash or margin to sell put options. Plus, you need a reliable and credible options broker in the UK with features aligning with your investment needs to enjoy your experience. Remember, selling put options gets you into a contract or agreement to buy specific equities in the future. That is why it is crucial to consider an options broker with adequate collateral to enable you to afford the purchase.
Example
If you are a put options investor looking to sell 3 weekly options on XYZ, you will use your investment account with a broker to purchase 300 XYZ shares. This is because one option is a contract or agreement representing XYZ 100 shares. Therefore, if you plan to sell multiple options, whether weekly or monthly, ensure the broker you are using supports you with adequate collateral.
Keep in mind that millions of options trade daily, most of which expire worthless. When this happens, options sellers get to keep their premium while buyers incur losses. This doesn’t mean that selling put options is better than buying. It all depends on your approach and strategy to maximise your profit potential.
That being said, here are the procedures involved when selling put options.
The first thing you need is to identify the best UK options broker. Then, go to its website and complete your account registration using your personal details as required. These include your name, email, phone number, date of birth, etc. It is also crucial to create a username and password to guarantee your account’s safety.
If you have chosen an FCA-Regulated options broker (as you should), you must verify your personal information to get your account fully activated. For instance, if you are trading with eToro, the broker will require you to verify your identity and location. Here, you will share a copy of your original ID card, passport, or driver’s license to verify your identity. You will also be required to upload a copy of a recent utility bill (not more than three months old) or bank statement to verify your location.
Every options broker has its own minimum deposit requirement that you must meet to access listed assets. Therefore, ensure you select an options broker with a minimum deposit requirement and trading charges you can afford. Once you make a deposit on a broker’s platform, you will automatically gain access to the listed assets to sell put options.
At this point, you must select a stock or index on which you wish to sell the put options. We believe you will have conducted thorough market research on the available stocks and selected the ones with increasing value. You will then scroll to the next expiration and choose the put option. To invest smart, consider selecting a put option that is 2 to 3 strikes out of the money. This way, you get to profit even when the stock’s value ends up slightly negative.
Select the sell to open order to start trading your position. Remember, always monitor your activities to ensure you never miss out on any potentially profitable opportunities. You will profit if the asset’s value increases or remains the same.
Pros and Cons of Selling Put Options
While put options trading tends to favour the seller, buyers also have ways to profit from this investment method. Below, we shed light on the pros and cons of selling out options to ensure you make the best decision on whether selling put options is worth trying.
- Selling put options allow you to benefit from an asset’s increasing value without making a purchase and taking full ownership
- You get an opportunity to earn high returns than your initial investment
- Selling put options comes with increased flexibility since it allows you to hedge your existing investments, thus limiting the chances of incurring massive losses
- They carry fewer risks than purchasing equities and taking full ownership
- Put options sellers get to generate income from the premium
- The obligation that comes with buying a put option at a strike price can leave you with losses
- Selling put options can be complicated for traders with limited experience
- You need approval from your broker to trade options
Learn how to trade options in the UK in our other guide.
Buying Vs Selling Put Options
Now that you are familiar with selling put options, we thought you should also get a little insight into what buying put options is. For this type of put options trading, you get to enter into a contract that allows you to speculate on the falling stock’s price by the date of an option’s expiry. Simply put, buying put options gives you an opportunity to benefit from the downward price movement of the underlying stock.
Overall, put options has allowed many traders to earn good profits from the financial market without taking complete ownership of the underlying assets. With the best broker and strategy, you can maximise your profit potential. Note that you can buy or sell put options using cash or margin accounts. Although cash accounts carry less risks, they limit your opportunities. Therefore, ensure you understand what margin trading is and consider trading using margin accounts for the best experience.
FAQs
Yes. Selling put options is an excellent way to make money since it allows you to profit from an underlying asset’s increasing value before the option’s expiry date. The best element about selling put options is that you also get to keep the premium if the sold put is not exercised and expires out of the money.
It s crucial to consider the premium you are likely to receive at the end of a put option’s contract. Therefore, consider selling a put anywhere from 30-45 days of expiration to receive a substantial amount of premium.
The amount of money needed to sell puts will depend on the asset you plan to invest in. Remember, a single put option represents an underlying equity’s 100 shares. Therefore, always conduct thorough research to select affordable assets for selling put options.
You should sell put options if you are comfortable owning the underlying security at a predetermined price. With selling put options, you do not have the rights but are assuming the obligation to buy the underlying asset from the buyer of an option should they exercise the option.
Selling a put option before the expiry date will earn you a lower premium. However, you can make good profits if the asset’s value increases above the strike price.
Yes. You can sell your put option anytime within the provided trading hours. Simply be sure to earn good profits before making this decision, although the premium earned will be low.
Bottom Line
Selling put options can be challenging, especially if you are a newbie in this industry. However, with the right approach, selling put options can limit the risks that come with stock investments while allowing you to profit from an asset’s rising price. To invest securely, consider buying put options as well so you can have an opportunity to benefit from not only a stock’s rising price but also falling.
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25,000 hours of testing 70+ brokers. Our recommended broker is Pepperstone.
Our recommended broker is Pepperstone.