Selling a Put Option

By Jason Fittler

Selling a Put option is a strategy you can use to buy a stock you want, at a lower price than market value.

Selling a Put option means that you sell someone the right to sell you their shares at a set price. For this right you receive a payment.

Here is how is works. Say XYZ is trading on market for $10 per share, you would like to buy this stock at this price but you are not sure if the price is going to drop further. What you could do is sell a Put.

Buy selling a $10 Put in XYZ you have given someone the right to sell you their share at $10 per share, for this you receive $0.50c per share or $500.00. What could happen from here;

1. Share price falls and you get exercised, Cost per share is $9.50, being $10 cost less the $0.50 premium you received for the sell the Put. This is below the $10 market price your were prepared to pay. Also keep in mind that this is a stock you wanted to buy.
2. The price goes up and you are not exercised, in this case you do not get the shares but you keep the $500. Money for Jam.

Risk – if you sell a Put over a share, which folds up, you will be in the hook for the cash even though the shares are now worthless. With this in mind we only trade on the large strong blue chip shares.

In a Bear market this is a great strategy for buying long term core portfolio shares. Through selling the Put you can pick up the shares cheaper or make some income it is a win win for you.

Keep in mind when selling Puts you must have the right conditions to place the trade, be patient and pick the timing. Also keep in mind that you must have the funds to pick up the shares if exercised.

If you are interested in this sort of opportunity give us a call 07 4771 4577.