Selling (short) put options Selling options obliges you to potentially buy or sell the shares that the option relates to. In the case of a put, this means an obligation to buy the underlying stock at the exercise price, any time up until expiry. In return sellers receive premium. Selling put options is generally used when you expect the share price to remain steady or increase slightly over the life of the option. In the event that it falls selling put options is a means of buying stock and being paid a premium to do so.
The written put can provide you with extra income in flat to rising markets. If the share price at expiry is above the strike price of the option, the option should expire worthless, and you have benefited from the premium income.
If the share price at expiry is below the strike price of the option, the option will be exercised, and you will have to buy shares. Your effective purchase price is the strike price of the option less the premium you received for writing the put.
Break-even: Strike price - Premium received
Market expectation: Neutral to slightly bullish / volatility bearish. Sellers expect a gradual rise in the market with lower volatility. The optimal strike to be sold depends on the outlook for the stock or index with more bullish the view, the greater the sold option should be in-the-money (higher strike) in order to maximise premium income.
Profit is limited to the premium received and thus if the market view is more than moderately bullish, a long call may yield higher profits.
CNP Price at posting:
0.0¢ Sentiment: Hold Disclosure: Held
