What does selling a put mean

I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. Selling Puts. Selling Calls. Writing Covered Calls. The Bottom Line. Key Takeaways Selling options can be a consistent way to generate excess income for a trader, but writing naked options can also be extremely risky if the market moves against you.

Writing naked calls or puts can return the entire premium collected by the seller of the option, but only if the contract expires worthless. Covered call writing is another options selling strategy that involves selling options against an existing long position.

Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.

Related Articles. Your friends would have to buy you drinks at the bar. I prefer companies that pay dividends, companies that have economic moats, companies with a differentiated product or service, and companies that have weathered recessions in the past. Put selling is moderately more conservative than normal stock buying, but you still must pick high quality companies to minimize your downside risk.

I only suggest selling options on companies with a moat and a good balance sheet that you would actually like to own at the right price. You either get paid a nice chunk of extra money for waiting to buy a stock you want at a lower price, or you get assigned to buy the stock at a low cost basis thanks to the option premium. This chart shows the potential rate of returns of this option sale compared to buying the stock today at face value:.

The horizontal axis gives a range of potential prices that the stock might be at during option expiration. The vertical axis indicates the rate of return over the lifetime of the option for each ending price, which was 3. The pattern you see continues off the chart, from zero to infinity. A similar strategy to the above example is to sell longer-term put options that are in the money, meaning the strike price is above the current market price.

In other words, options that have an expiration date that is more than 12 months away. The premiums for this type of option will be higher, and thus even though the strike price is higher than the market price, your cost basis if you buy the shares will be considerably lower than the market price. Shares took a big price hit when oil prices collapsed in , as refining margins decreased, and the stock had been roughly flat ever since. OPEC agreed around this time to a deal to cut oil production, which has resulted in rising oil global prices, which should benefit this refiner in the long term by increasing their margins.

For a put buyer, if the market price of the underlying stock moves in your favor, you can elect to "exercise" the put option or sell the underlying stock at the strike price. American-style options allow the put holder to exercise the option at any point up to the expiration date. European-style options can be exercised only on the date of expiration. Buying and selling put options can be used as part of more complex option strategies.

Put options can function like a kind of insurance for the buyer. A stockholder can purchase a "protective" put on an underlying stock to help hedge or offset the risk of the stock price falling because the put gains from a decline in stock prices.

But investors don't have to own the underlying stock to buy a put. Some investors buy puts to place a bet that a certain stock's price will decline because put options provide higher potential profit than shorting the stock outright. The buyer has two choices: First, if the buyer owns the stock, the put option contract can be exercised, putting the stock to the put seller at the strike price. This illustrates the "protective" put because even if the stock's market price falls, the put buyer can still sell the shares at the higher strike price instead of the lower market price.

Second, the buyer can sell the put before expiration in order to capture the value, without having to sell any underlying stock. Then the put seller keeps the premium paid for the put while the put buyer loses the entire investment. The graph below shows the put buyer's profit or payoff on the put with the stock at different prices. The other is short selling.

The difference between the sell and buy prices is the profit. There's a reason why put buyers get excited. Buying puts offers better profit potential than short selling if the stock declines substantially. In contrast, short selling offers less profitability if the stock declines, but the trade becomes profitable as soon as the stock moves lower.

The biggest advantage for short-sellers, though, is that they have a longer time horizon for the stock to decline. Options may expire worthless, and you can lose your entire investment. The Greeks , a series of handy variables, may help you better position yourself accordingly when you utilize them. Put options are basically the opposite of call options , which give the option buyer the right to buy a particular security at a specified price any time prior to expiration.

You can buy put options contracts through a brokerage, like Ally Invest , in increments of shares. Non-standard options typically vary from the share increment.

Pro tip: When the market price of your underlying stock falls below break-even the strike price minus the premium you paid, excluding commissions , it is profitable. This trade is known as a long put strategy. Like call options, specific strategies exist for put options. Some of the more common strategies include protective puts , put spreads, covered puts and naked puts. A protective put also known as a married put lets you shield the securities you own from price declines.

How so? You continue to hang onto your existing shares taking a long position , while also having put options, which can be thought of as an insurance policy or a hedge against price declines. Since potential growth of a stock is limitless, you can say that the profit potential of a protected put is also limitless, minus the premium paid. There are two types of put spreads: bull put spreads and bear put spreads. When executing a spread, you are both a buyer and seller. A bull put spread is an options strategy you could use if you expect the underlying asset to experience a moderate price increase.