Put stock options are a trading approach that only a few people need to consider, Unless you have enough time to do daily stock research, keep abreast of your trades and positions, and have somewhere in the neighborhood of a minimum of $200000 in marginable assets. If you meet this terms this posting could help you make income with put options.
The technical name for selling a put option is actually called "naked puts". The term does have purpose however since what you are doing is placing a bet that a stock will not go down and since you do not own the stock you are writing on option that is considered naked. The income approach with naked puts is to find stocks that you believe are good companies and you either believe are good buys now or would be a better buy at a cheaper price. Be realistic with yourself do not sell put options just for the producing income, do your homework and be confident you are willing to own the stock and more importantly be very happy to own the stock at a lower price.
Once you have decided on your stock go to the options table on Yahoo and check the option premiums on your security. You decide the strike price, the month for your option, the number of shares you would be willing to own, and then you sell your put option. You will then receive the premium for the option in your account as income less the brokerage commission. The income is yours to keep.
If the stock sells for more than your strike price anytime between now and the expiration date the option expires worthless. if the stock sells below the strike price anytime between now and the expiration date the option holder has the right to put the stock to you at the option strike price. One point of clarification here, when the stock is put to you the stock must be selling below the strike price. If the option holder sees the price dip below the strike price and then the stock moves back up above the strike price they can not force the you to buy the stock. Their risk, your gain.
Also note when you sell the put option you must have the money in your account to buy the stock if put to you. No brokerage will allow you to sell put options without adequate resources to buy stock when put to you. The other fact here is you are liable for buying the stock no matter how far down the stock goes in price. In effect you are selling insurance on the stock.
Put options are an excellent way to produce income, but it is absolutely necessary to be willing to do research and keep up with options you have sold. Discipline is a neccesity. Below is an example.
Let's use BP oil company for an example. BP is selling as of writing this posting at $44 per share. A put option for $40 per share on BP that expires in October is selling for $1.46 per share. Using 500 shares for an example, you sell 5 put option contracts ( a contract is 100 shares ) on BP at $146.00 per contract makes you $730 in premium less commission. Using Scottrade prices the commission cost would be $13.25 leaving you $716.75. You now wait to see if the stock sells below $40 per share to see if it will be put to you. You also will need $20000 to buy the 500 shares if put to you. Annualized return on option 9.6% plus interest on $20000 over 4 months and two weeks.
The simplicity of selling put options is obvious. It also is a good way to buy stocks at a discount. The Small Town Investor Hedge Fund operates just this way. STI Hedge Fund does have some other techniques that make the buying of put options more profitable, but that is not needed for the average investor, nor am I willing to write about skills that have taken years to learn.
If you are considering using put options to buy stocks and make income, let me suggest just the example I did above as a excellent trade to do right now. BP oil company has been beaten down due to the problems in the Gulf of Mexico last year and I believe is now on the way up in price. Oil prices are headed up long term, and I expect BP is due to raise their dividend some more soon. One other note about BP, the news that the company has about paid out almost all claims in the Gulf and the total looks to be around $4 billion total cost. I would assume the rest of the $20 billion set aside will be coming back to the company in some form down the road. All these should put a floor in this stock. Even if you have it put to you at $40 you likely got a good price on a company with good future prospects.
One other trading opportunity I consider a good opportunity right now is Goldman Sachs, symbol GS. I have wrote about this stock in an earlier posting. A GS put option for October with a strike price of 120 is selling for around $4.10 per share. Selling two contracts would get $820 premium with you being liable for $26000 if the stock sells below $120 per share. With GS selling now for $134 per share I believe there is more than significant room for the price to go down when and if indictments are issued following the current criminal investigation. Again, GS is the top investment bank and I can not see if selling below book value, Goldman Sachs is not going away as a company and will recover from any bad news long term. GS would be a excellent buy at $120 per share. Annualized return 8.4% plus interest on $26000.
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