Ever wondered why some investors seem to make money no matter what the market is doing? While I was watching Tesla’s stock crash by more than half between 2023 and 2024 most shareholders were crying into their portfolios. But a small group of savvy traders were actually making money during the decline. Their secret weapon? Selling put options.
I’ve been trading options for years, and selling puts has become one of my favorite strategies. It’s like getting paid to go shopping for stocks at discount prices. Let me show you exactly why you might want to consider adding this powerful tool to your investing arsenal.
What Exactly Is Put Selling?
Before diving into the why, let’s make sure we’re clear on what selling puts actually means.
When you sell a put option, you’re essentially making this promise to someone else: “If this stock drops below a certain price (the strike price) before a specific date, I’ll buy it from you at that strike price.” In exchange for making this promise, you immediately receive money (the premium).
It’s kind of like being an insurance company. You collect premiums for providing “protection” against falling prices. If the stock doesn’t fall below your strike price, you keep the premium as pure profit. If it does fall, you end up buying shares at the strike price (which might still be a good deal).
Two Major Reasons to Sell Puts
There are mainly two reasons why I sell puts, and why you might want to consider it too:
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To generate income – Those premiums you collect are yours to keep, regardless of what happens with the underlying stock.
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To buy stocks at a discount – If you want to own a particular stock anyway, selling puts can help you acquire it at a lower price than its current market value.
Let me explain both of these benefits with some real examples.
Income Generation: Getting Paid to Wait
One of the coolest things about selling puts is that you get paid immediately. The premium lands in your account as soon as the trade executes.
Here’s a practical example:
Let’s say Company ABC is trading at $100 per share. After doing your research, you believe it’s unlikely to drop below $95 in the next month. Instead of just setting a limit order to buy at $95, you could sell a put option.
If you sell one put contract with a $95 strike price expiring in one month, you might collect a $3 premium per share. Since each contract represents 100 shares, that’s $300 in your pocket right away!
If the stock stays above $95 through expiration, the option expires worthless, and that $300 is your profit. That’s a 3.2% return on the $9,500 that was securing your put ($95 × 100 shares) – in just one month! Try getting that from a savings account.
Buying Stocks at a Discount
The second reason I love selling puts is that it’s a clever way to buy stocks I want to own anyway, but at better prices.
Going back to our Tesla example from the beginning: Let’s say you thought Tesla was too expensive at $250 in mid-2023, but you’d be happy to buy it at $200. Rather than just waiting and hoping, you could sell a put with a $200 strike price.
If you collected $15 per share in premium, you’d immediately pocket $1,500 (for one contract). Then:
- If Tesla stays above $200, you keep the premium but don’t get the shares.
- If Tesla drops below $200, you’ll buy the shares at $200, but your effective cost would actually be $185 ($200 – $15 premium).
Either way, you win! Either pure income or shares at a significant discount.
Best Practices for Selling Puts (That I’ve Learned the Hard Way)
Like any strategy, there are right and wrong ways to sell puts. Here are some crucial guidelines I follow:
1. Only Sell Puts on Stocks You Actually Want to Own
This is the golden rule I never break. I only sell puts on companies I’ve thoroughly researched and would be happy to own at the strike price. Think of selling puts as placing a limit order to buy shares – because that’s effectively what you’re doing.
If you wouldn’t be comfortable buying 100 shares of a stock at your chosen strike price, don’t sell puts at that strike!
2. Calculate Your Net Price
Before entering any trade, I always calculate my “net price” – that’s the strike price minus the premium. This represents my true cost basis if I end up buying shares.
For example, if I sell a $150 put on AMD and collect $3 in premium, my net purchase price would be $147 per share if the stock falls below $150. This net price should represent a good value for the stock in your analysis.
3. Watch Your Position Sizing
I’ve seen too many traders blow up their accounts by selling too many puts. Remember, each put contract represents the obligation to potentially buy 100 shares. If you sell 10 contracts at a $50 strike, that’s a potential $50,000 commitment!
Most experienced put sellers (including myself) limit exposure to 15-20% of the cash needed to buy shares. Your broker will require you to maintain either cash or margin capacity to cover your potential obligation.
How Put Selling Works in Different Market Conditions
One thing I really love about selling puts is how adaptable the strategy is to different market environments. You just need to adjust your approach:
In Bull Markets (Like Much of 2024)
During strong markets, put premiums tend to be lower because there’s less fear among traders. However, I still find opportunities by:
- Selling puts at strikes 10-15% below current market prices
- Being more selective and patient
- Focusing on temporary pullbacks in strong stocks
For example, if Microsoft is trading at $400, I might sell puts at $350, collecting smaller premiums but with less likelihood of shares dropping to my strike price.
In Bear Markets (Like 2022)
Bear markets can offer the juiciest put premiums since everyone’s nervous. This is when I get most excited about selling puts, but I’m also extra careful with position sizing.
Instead of selling puts at just one price level, I often “ladder” my strikes. For instance, if I like a $50 stock, I might sell one put at $45, another at $40, and another at $35. This way, if the stock keeps falling, I’m buying shares at progressively lower prices while collecting bigger premiums.
In Sideways Markets
Markets that trade in a range can be ideal for put selling. During these periods, I work to identify clear support levels – prices where stocks have repeatedly bounced higher.
If a stock has consistently bounced off $80, selling puts at that level often makes sense. The premiums won’t be as high as in bear markets, but the probability of success is usually higher when price patterns are well established.
A Real-World Worst-Case Scenario
Let me share a cautionary tale to show what could happen if things go wrong:
Imagine Company XYZ’s stock is trading for $50, and you sell three-month puts with a strike price of $40 for a premium of $5. If you sold 10 put contracts, you’d collect $5,000 in premium upfront.
Then disaster strikes! Federal regulators and law enforcement launch an investigation into massive fraud at Company XYZ. The company quickly goes bankrupt just before your options expire. The shares become worthless.
The put buyer will exercise the option to sell you these worthless shares at $40 each, forcing you to pay $40,000 for worthless paper. Your net loss? $35,000 ($40,000 minus the $5,000 premium you collected).
This is why I never sell puts on companies I haven’t thoroughly researched, and why I limit my exposure to any single position.
Comparison to Other Options Strategies
Some folks ask me if they should buy calls instead of selling puts. It depends on your risk tolerance and objectives:
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Buying calls: Your maximum loss is limited to the premium paid, and your potential gain is theoretically unlimited. This is better for more risk-averse investors.
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Selling puts: Your maximum gain is limited to the premium received, while your potential loss can be much larger. This strategy is better for more experienced traders comfortable with the risks.
Is Put Selling Right for You?
I believe put selling can be a valuable strategy for many investors, but it’s not for everyone. You might consider selling puts if:
- You have done thorough research on stocks you want to own
- You have enough capital to actually buy the shares if required
- You understand options mechanics and the risks involved
- You’re patient and disciplined in your approach
On the other hand, put selling might not be suitable if:
- You’re new to investing or don’t understand options
- You’re trading with money you can’t afford to risk
- You haven’t researched the underlying companies
- You’re just chasing high premiums without a plan
My Final Thoughts
Put selling offers a strategic way to collect income while potentially buying stocks at below-market prices. When done right, you get paid while waiting to buy shares at your desired price point.
However, success requires more than just chasing the highest premium. You must be financially and mentally prepared to take ownership of shares if they fall below your strike price. Remember that collecting a 3% premium might seem attractive, but it won’t offset significant losses if you’re forced to buy a stock that’s in free fall.
I treat put selling primarily as a stock acquisition strategy with collecting premiums as a nice bonus. If you approach it the same way, you’ll likely have much more success with this powerful income-generating tool.
Ready to start selling puts? Make sure you’ve done your homework on the underlying stocks first, and start small until you’re comfortable with how the strategy works in practice.
WHAT IS A PUT OPTION?
A put option is a derivative contract that lets the owner sell 100 shares of a particular underlying asset at a predetermined price (known as the strike price) on or before the expiration date. Put options give the owner the right, but not the obligation, to realize the theoretical equivalent of 100 shares of short stock below the strike price, less the extrinsic value premium paid for the contract itself.
Unlike with call options, where a long position means that the trader’s directional assumption is bullish, long put options reflect a bearish market expectation. If the asset’s price goes down, the put increases in value. On the other hand, if it rises, the value of the put option decreases, which (in this case) is in favor of the short put position. Just like call options, traders can be long or short put contracts, depending on their trading goals.
The right to sell the underlying asset is secured through paying a premium to hold the theoretical equivalent of 100 short shares of stock below the put strike for a limited amount of time. Since put buyers don’t have an obligation to short-sell the 100 shares, they can go the alternative route of letting the option expire worthless and only give up the premium paid up front. This is typically done if the stock price stays above the strike price. They can also sell the put contract to close the position and retain any extrinsic value remaining.
If the stock price falls well below the strike and the put buyer exercises their right to sell, the counterparty is obligated – through assignment – to buy 100 shares from the put contract owner, resulting in 100 short shares for the put contract owner. The put owner can also sell the contract instead of taking short shares to close the position – if the put is worth more than what the trader bought it for up front, the transaction results in a profit.
The three key characteristics of options contracts are:
- Strike price: the predetermined price at which the buyer and seller exchange the underlying asset, i.e. 100 shares of stock per contract
- Expiration date: the day on which the contract settlement takes place, or the contract expires worthless
- Premium: the amount paid per contract to become an option owner
Long Put Options
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OTM |
ITM |
Short Put Options
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OTM |
ITM |
BUYING A PUT OPTION (LONG PUT)
Buying a long put is typically indicative of a bearish market expectation. To be profitable with a long put contract, the underlying assets price will need to have a significant downwards move that crosses the put strike on or before the expiration date of the contract. Long put buyers essentially hope for the put to be deep in-the-money (ITM) well ahead of, or at the contract’s expiration date, so that the contract has real intrinsic value to the owner. The put buyer stands to profit if the option price is worth more than the cost paid upfront to purchase it.
Imagine you believe that Company XYZ’s stock price is on the verge of dropping substantially. With its current price at $1,000, you think it’ll drop below $900 in the near-term.
Buying one long put gives you exposure to the theoretical equivalent of 100 shares of short stock at a significantly lower cost up-front, as you wouldn’t own the shares outright. Owning 100 physical shares at the current market price translates into $100,000 of total risk. However, a put option also gives you exposure to 100 shares, only for much less.
Suppose you buy a 30-day put option on Company XYZ stock at a premium, i.e. debit paid, of $5 per share ($500 in real dollar terms) and a strike price of $900. If the stock experiences a price drop that passes the strike price by more than $5 by the expiration date, you can sell the contract at a higher premium for a net profit.
If the stock, however, doesn’t fall below the $900 strike, the value of the put can still increase considerably if there’s a sharp bearish move in the underlying’s price with a lot of time left to expiration. Assuming that this swift decrease moved the stock price past the put strike to $880, you could sell the contract for at least $20 or $2,000 of intrinsic value, plus any remaining extrinsic value in the contract itself. Let’s say there’s also $2,500 of extrinsic value remaining in the contract. This would result in a profit of $4,000 (after subtracting your cost to enter the put contract). If you held this to expiration, you would lose all the extrinsic value, and if the stock is still at $880, you would realize a profit of $1,500 if you sold the contract for its intrinsic value of $2,000.
Suppose you hang on to the contract through expiration, but the stock price remains well above the strike price. The option would expire worthless and you’d only forego the $500 premium paid upfront for exposure to the theoretical equivalent of 100 shares of short stock.
Put Options Explained: Options Trading For Beginners
FAQ
Why would you sell puts?
Selling a put option is a bullish position, as you are betting against the movement of the stock price below your strike price– so, you’d sell a put if you think that the underlying’s price will rise. If the underlying’s price does, indeed, increase and the short option expires OTM, you’d make a profit.
When should we sell put options?
Why did Warren Buffett sell his stocks?
What are you doing if you sell a put?
A put option is a financial contract that comes with the right to sell a certain asset at a certain price, even if the market price is lower. The price for selling the asset is called the strike price, and the deadline for selling it is called the expiration date.