Put options give you the right, but not the obligation, to sell at a specific price (strike price) by a predetermined date (expiration date). Option contracts are derivatives based on the value of underlying securities such as stock. They usually represent 100 shares of the underlying security. 

Typically a put gives you the opportunity to profit from price depreciation (losses) in the underlying stock. But you can also sell a put option without ever owning it in the first place. In this case, when selling a put you want the price of the underlying stock to stay the same or go up. 

A great reason to sell a put is if you want to purchase a particular stock at a particular price in the future, and by waiting you can get paid a premium (the current market price of the contract). The premium is why selling a put is also referred to as insurance. You’re insuring the market that you’ll buy shares in the future. Yet since you have the right and not the obligation to pay back at expiration, you can have someone else buy the shares instead. Either way, the market knows this transaction will happen in the future.

Selling a Put Option

When selling a put, someone else bought a put from you. You’re short-selling a put when you sell a put you never had in the first place. Your put option value will rise when the price of the underlying stock stays the same or rises.
Sell a Put with Flow
QQQ 356 Put Option is falling when QQQ Stock rises. (This is why we are selling a put, not buying a put.)
Current Strategy shows your point of purchase and it’s growth. We sold 1 Put Option.
Easily see winning options, giving you the most profit when QQQ Stock rises.
Quickly limit loss by seeing which options are un-profitable when QQQ Stock rises.

On this InFabric Strategy the price of the underlying stock (QQQ Stock) is expected to rise. Notice QQQ 356 Put is in the red, yet our Strategy is in the green. Remember, puts fall when the underlying stock rises, yet if you sell a put you’ll project profits.

Let’s get into the details:

QQQ 356 Put 2021-02-12

  • QQQ = Stock Ticker of Underlying Stock
  • 356 = Strike Price
  • Put = Put Option (expecting QQQ Stock to rise or stay the same when selling a put)
  • 2021-02-12 = Expiration Date

Options are derivates of a stock, and QQQ is the underlying stock. The strike price of 356 shows the value you project the price to be in the future. When selling a put you think the price of QQQ Stock will be equal to or more than $356 by the expiration date.

Closing a Put Option

Exiting BEFORE Expiration:

When you buy a put option before it expires you can gain a profit if the value of your put price falls. This mean the price of the underlying stock is more or equal to the price it was when you bought the put (stock price now ≥ stock price at buy-in).

In our example, we could sell QQQ 356 Put Option on Feb 12 (in 2 days), giving us a 14% profit.

Exiting AFTER Expiration:

If you keep the put option until after expiration two things can happen depending on if it’s out-of-the-money or in-the-money.

Out-of-the-money means the strike price of the put option is lower than the current price of the stock (strike price < stock price). If that’s the case your put is now worth $0, so you gain 100% return on your investment.

Sounds odd but hear me out. In a normal scenario you buy low sell high, except here you’re selling first. That’s not a normal scenario. You’re trying to sell high then buy low. Same concept and same outcome, just different order.

When you sold you have unrealized profits of X (price), then to realize those profits you paid back at current price (price at expiration in this case). The lower the amount you have to pay back, obviously the better. Let’s pay back $0!

In our example, if we were out-of-the-money at expiration we would have seen the strategy line on the chart be green. This means the stock price remains higher than the strike price. AI Intelligence updates Flow charts by the minutes to show the most accurate predictions.

In-the-money means the strike price of your put option is equal to or higher than the current price of the stock (strike price ≥ stock price). Your broker will execute the option for you, meaning it will buy 100 shares for every put option contract you sold, at the strike price.

Bc of the way options are priced, at expiration time value of the option is $0 which means you will earn at least some profit (technically called the premium, but that’s for another time, another post)

In our example, if we were in-the-money at expiration we would have seen the strategy line go into the red. So the stock price is lower than the strike price.

In Summary

Selling put options might just have some of the most complex strategies. Remember when I said in this post that options can be like driving blindfolded? That definitely holds true here.

Trying to put it plainly, the concept of selling a put is to sell high then buy low. The put’s value decreases as its underlying stock rises. But that’s a good thing! We want to pay back as least as possible.

Ideally an options trader would sell a put option only if they don’t mind owning the underlying security at the predetermined price since you’re assuming an obligation to buy if the counter-party chooses to exercise the option. (More detail on this in a future post to come.)

But even if you sold the right put you might still lose money. InFabric is driven by the desire to take these complexities and turn them into something comprehensible. Something you can understand in a moment’s time, because sometimes that’s all you have.

We provide the weapons for this difficult battle.

Create a Strategy today! See just how easy options can be with the right weapons!

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