A Beginner’s Guide to Selling Puts for Income

Dear Reader,

Americans have lost an average of $6,000 in purchasing power due to the sharp increase in inflation over wages, which is an incentive to find ways to make up for the loss.

By November last year, the S&P 500 had gained 25%, which were all erased by June of this year.

With the Fed meeting, mid-term elections, along with other economic reporting over the next couple of weeks, the market is at crossroads for direction right now.

That makes right now a great time to learn about selling put options as a means of generating income on a regular basis to recover from the economic disaster we’re experiencing.

Selling put options is not only a great way for beginner option traders to get acquainted with options, but it’s a way for traders of all skill levels to start creating regular income.

I’ll help you get started with the basics of put selling as an income strategy. Once you’re comfortable with idea, you’ll be capable of selling them on a regular basis – weekly, monthly or as often as you select.

Let’s get started.

Puts are option contracts that can be bought or sold.

Whether you’re buying shares of a stock, a gold bar or put option contract, you eventually hope to sell it back and lock in a profit.

For every option buyer, there is someone on the other side of the trade – the seller.

So, put options have buyers and sellers, and as an income trader, you’ll simply be the seller – it’s feels a little like trading in reverse…

You’ll sell the contract to open the trade, collect an immediate credit, then as time progresses you will close out your trade by buying the contract back.

Selling a put contract and then later buying it back is actually a fairly simple process.

So, let’s talk about the basics of put options.

Since put options are contracts, there are rights and obligations associated with the contract.

The trader who buys a put option has a right to sell shares of a stock at a fixed price – the strike price. As a put seller, on the other hand, we’ll have an obligation to buy shares at a fixed price.

Let’s look at the image below to get some clarity.

On the left of the image, the strike price is the amount we will pay for the shares if we end up purchasing them at expiration. The expiration date is located in the center – which simply means that after December 03, 2022 the contract will have expired.

Now, we’ll multiply each number by 100 since quotes are usually shown as a per share amount.

So, by selling the $38 put, our account would receive $133 instantly. In the end, if we were able to acquire shares of the stock, we’ll pay $3800 for 100 shares. More on that below…

Let’s talk about the potential outcomes of selling puts.

Each put contract has an expiration, and in the end the stock’s price will most likely be trading at a value above our selected strike price, or below it – and the outcome of the trade will be determined by this.

If you decide you would prefer to collect regular income from selling puts, the best scenario would be to have the stock trade above your strike price at its expiration. When this happens, the option expires worthless and you end up with the keeping the full credit in your account, and you’re now ready to move on to selling your next option.

For those times when you’d prefer to take ownership of the stock, the best scenario would be for the stock to trade below your strike price. In this scenario, you’ll still get to keep the credit you received when you sold the put, but you will also be assigned 100 shares of the stock – and you’ll pay the amount of the strike price for those shares.

In the illustration above, if the stock’s price traded below the strike price at expiration, you’d pay $38 per share for the stock – which is now an investment in your portfolio.

Now it’s possible you don’t want the shares of the stock, but would rather just stick with collecting the regular premiums instead.

To avoid having to purchase shares of the stock in your portfolio, you can choose to buy back the contract before it expires and close out the trade.

If the stock’s price has fallen slightly below the strike price, you may be able to profitably exit the trade, but if the stock’s price has fallen sharper than anticipated, you can still exit the put at a loss on the put trade before moving on to the next trade.

To learn more about this and other money-making strategies, be sure to join me in my live discussions Monday through Wednesday on the Money Morning Live show – click here and save it to your favorites.

It’s hard enough to watch the market take a hefty toll on investment portfolios, so I know the sting of losing buying power due to high inflation feels unbearable.

Selling puts can be a great way to get started with option trading and to generate regular streams of income to help offset our current economic situation.

Until next time,

Tom Gentile
America’s #1 Pattern Trader

Join Tom each Monday through Wednesday at 12:00 p.m. ET as he discusses a range of strategies to make money in a strained market environment.

Did you miss the Live session? Watch Tom’s replays!

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