Hey there, Power Profit Traders!
My next LIVE trading session starts at 9:30 a.m. ET right here, and it’s an important one for all you stock and option buyers who’ve been toying with the idea of selling premium.
Depending on your level of experience, you may or may not know that call and put options can be used in a variety of ways to fit any outlook; they aren’t just for buying as straight-up bullish or bearish bets.
Of course, the most common way traders use options is the simple “vanilla” purchase of calls on a stock expected to go higher, or puts on a stock expected to go lower…
But what if I told you that script could be flipped? That you could take the other side of the coin, so to speak?
Specifically, you can also SELL OPTIONS TO OPEN — taking the other side of those “vanilla” trades out of the gate.
I know it’s difficult for rookies to wrap their heads around being able to sell something intangible that they didn’t buy in the first place, but lucky for you, you’ve got ME to show you the ropes!
So today I want to dive into what it means to be a put seller — the logistics, how I hunt potential trades, and why you shouldn’t be intimidated to add this strategy to your trading repertoire.
(And when you’re done reading and bookmarking this how-to, hop in the room at 9:30 a.m. ET to watch me touch on this LIVE.)
Put Selling 101
When a trader buys to open a put, they’re either betting on or protecting against a downturn in the stock.
Purely speculative put buyers (those not protecting shares with options insurance) are 100% bearish — they want the stock price to fall beneath the option’s strike price before the contract expires.
The further the shares sink beneath the strike, the deeper into the money (ITM) the put becomes, and the more the buyer stands to profit.
If the option doesn’t move into the money in time or by enough to cover the initial cost to buy the contract, the buyer could lose all or part of their initial premium paid, which represents the maximum risk on the trade.
However, there is someone on the other side of that trade — the person who SOLD to open those put options.
The put seller’s motives, risk and profit potential are all drastically different from that of the put buyer.
Motives: The put seller is expecting the underlying shares to stay ABOVE the strike price through expiration — so their outlook is neutral to bullish.
Risk: If the underlying stock falls beneath the put strike and the option moves ITM, the buyer on the other side has the right to exercise the option — meaning the put seller is on the hook to buy 100 shares of the stock at the strike price… which could be pretty steep, depending on the specific equity.
Many traders sell what’s called a “cash-secured put,” requiring them to have enough cash on hand in the event they have to purchase the shares. (Selling “naked” puts without protection requires higher clearance and a much stronger stomach for risk.) So it’s important to not sell put options on a stock you wouldn’t feel comfortable owning, if you had to.
Profit potential: The put seller will receive money (or “premium”) for the option immediately. As long as the underlying stock stays above the strike price, the put option will remain out of the money (OTM) and the seller can pocket that entire premium, which represents the maximum potential reward.
Because the best-case scenario is to retain the initial credit, I like to look for options that are generating relatively juicy premiums. After all, as the seller of anything, you’re looking to get as much as you can out of your asset, right?
A good place to start your hunt for juicy premiums is my Expensive IV list from the TG Suite’s Morning Report tool, which is free to download and use.
This data is updated after the closing bell each session, and compares current implied volatility (IV) against a set of near-the-money options over the last year.
Expensive IV means the current IV is at the high end of its 52-week range, meaning option premiums are running hotter than normal.
You can see on today’s
Power Profit Trades Watchlist that several tech stocks have expensive at-the-money (ATM) options, including
HP Inc (HPQ) at the top of our list.
However, make sure you check the event calendar on these stocks, as oftentimes they’ll make the list due to the IV run-up heading into an earnings report… like HPQ, in fact.
If you sell a put option on a stock before earnings, you could capture some healthy premiums, sure — but you’re risking a big-league swing in the wrong direction, and steep possible risk.
In my Rocket Wealth Initiative trading program, which focuses on carefully selecting options to sell, I have a lot more tools and checks & balances in place to make sure I’m only focusing on the highest-probability trades (call our VIP Services Team at 866-698-4749 to hear the details).
That’s all for today, but hop in the room at 9:30 a.m. ET to hear more about how I use this strategy for wealth creation without the fuss of being glued to my computer…
See you in there!
Tom Gentile
America’s #1 Pattern Trader
