Selling put options can allow the generation of regular income, but deciding the strike price and expiry date is always challenging.
By theory, a lower strike price will fetch a higher premium for sellers, but it comes with higher risk of assignment, possibly result in an overall loss instead.
Also, by setting a further expiry date can fetch a higher premium for sellers too, but it comes with both risk and opportunity, for the stock price to fall or increase. Stock price fall can result in an overall loss, while stock price gain will increase the likelihood for the option to expire without value.
To decide on the strike price, we need to determine what we want.
1. If you want small profit with minimal risk, try to set a very far ‘out-of-money’ strike price, such that we can likely gain the premium with little risk of assignment.
2. If you are generally long term bullish over the stock, you can also set a longer expiry, so that the sold put can have higher premiumdue to time value factored in.
3. If you want more profit (with higher risk), and you believe the stock price can increasein the short term, you can set a ‘at-the-money’ strike price (where strike price = current stock price) and hope the the stock price can increase above the strike price when the option expires.
4. If you have the intention to own the stock,you can also consider setting a ‘at-the-money’ or even ‘in-the-money’ strike price, such it is more likely for you to be assigned by expiry, and you also get to enjoy discount for buying the stock, since the overall cost paid to buy the stock including the premium collected will always be lower than the current market price of the stock, when you made the decision to sell the put.
In short, option is really a good tool for us to generate small income over time, and to buy stocks we want to buy at a discount. Make good use of it, to increase the value of your investment. May all of us huat big big over time [Smile]
$Bank of America(BAC)$$Tesla Motors(TSLA)$$Microsoft(MSFT)$
Comments