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Selling Put Options

Put options give the holder the right to sell a particular stock at a set price within a specified time period. So, when an options trader sells a put option contract, they are agreeing to buy the stock at the strike price if the option is exercised by the holder.

There are two key reasons why someone might sell put options:

  • It can be a way to generate income.
  • It’s a way to acquire a particular stock at a lower price than it’s currently trading at. If the stock price falls below the strike price, the trader will be obligated to buy the stock at that price.

No matter what happens to the price of the stock at expiration, the trader gets to keep the option premium.

Risks

When writing put options, the biggest risk is that the stock price falls sharply and the trader will be obligated to buy the stock at a much lower price than it was when they sold the option. This can lead to paper losses, especially if the stock price falls far below the strike price. For this reason, it’s always best to sell put options on quality stocks that the trader would want to own.

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