Sell Google leap put at 1% per month $100 earn
puppy says
Selling put and call options time is on your side when
U buy put and call options time is against you
I sold a put for Google at 8.70
Should be able to buy back at 7.70 soon
@Daily_Discussion @TigerStars @TigerEvents
What is selling a cash covered put?
Selling a cash-covered put option (aka writing a cash-secured short put) means opening a contract where you have the obligation to buy shares of a stock at a certain price (the “strike price”) up until a set date (“expiration date”), and you already have the cash to meet your obligation (aka it’s “cash-covered”). You receive an upfront amount (the “premium”) in exchange for selling this contract. A typical short put option entails the obligation to buy 100 shares of the underlying stock.
Because you have this obligation, in general it’s beneficial for the stock price to stay relatively flat or increase in the future, and it’s undesirable for the stock price to fall. Your maximum potential profit is limited, while your maximum potential loss could be substantial.
Here’s some lingo to describe how your short covered put option is performing relative to the stock price:
In-the-money: The stock price is below the strike price
At-the-money: The stock price is at the strike price
Out-of-the-money: The stock price is above the strike price
Please note: Robinhood does not allow uncovered or naked positions.
When might I use this strategy?
You might consider selling a cash-covered put if you think a stock price will stay relatively flat or rise in the future (i.e., you have a neutral-to-bullish outlook). You can do this on Robinhood only if you hold enough cash to cover your short put.
There are typically two main reasons to use this strategy: To potentially buy a stock you would like to own for less than its prevailing market price, or to earn additional income through the premium you receive by selling the contract (aka “monetizing” uninvested cash). If the stock price ends up staying at or above the strike price before expiration, the option should expire worthless and you get to keep the premium you received for the put. If the stock price closes below the strike price on the expiration date, the put will likely be assigned, in which case you would buy shares at the strike price and keep the premium you received for the put. In that situation, you’re paying above market price for the shares, but you’d be generally paying less than you would have if you bought shares at the time that you sold the put.
Keep in mind that your losses from being assigned can be significant, if the strike price is much higher than the prevailing market price.
What are factors to consider?
Here are a few key factors:
Expiration date: Assuming all other factors are constant, selling a put with a nearer expiration date will typically have a lower premium, but it also reduces the time frame in which the stock could fall below the breakeven point. If the put expires worthless, you can potentially write new puts more often. Selling puts that expire later typically means you can receive a higher premium, but you won’t be able to write new puts as often. Even though you receive more upfront, there’s also more time for the stock to move below the breakeven point.
Strike price: This is the price at which you’re required to buy the shares if the put is assigned. Puts with a lower strike price are less likely to be assigned and usually earn a lower premium, while puts with a higher strike price generally have a greater chance of being assigned and usually earn a higher premium.
Premium: This is the money you receive upfront for selling the put. Assuming all other factors are constant, the higher the premium you receive, the more likely the put will be assigned, and the more likely it is that you’ll need to buy the underlying shares at the strike price.
Contract: Each option typically represents 100 shares. If you sell more cash-covered puts, the total premium you receive is higher. But you also need more cash on hand in case they’re assigned. Selling fewer puts means you get less money in premiums. However, you don’t need as much cash to cover the contracts, and you take on less risk.
Calculations
Can I see an example?
Let’s say you expect stock in the fictional PURR company, which is trading at a price of $50 a share, to stay relatively flat or increase in the near future. So, you decide to sell a put option for PURR shares at a strike price of $45, receiving a $2 premium. You have enough cash in your brokerage account to buy 100 PURR shares at this price ($45 * 100 = $4,500 of uninvested cash), so your put is covered.
Maximum Gain and Loss
Your maximum potential gain is the premium you received. In this case, that’s $2 per share, or $200 total. This should be realized if the stock closes at or above the strike price on the expiration date, and the option expires worthless.
In the worst-case scenario, the stock price could fall all the way to $0. If that happens with PURR, your loss would be $43 per share ($0 - $45 + $2). That’s a $4,300 loss for a contract that represents 100 shares.
PURR rises to $55 (aka out-of-the-money)
Let’s say your expectation is met, and PURR’s stock price climbs to $55 at expiration. Since this is above the strike price, the put shouldn’t be assigned and should expire worthless, allowing you to gain $200 in total premium for 100 shares. This is the maximum potential gain on this trade, even if the stock price increases further.
PURR falls to $35 (aka in-the-money)
Instead, let’s assume PURR’s stock price falls to $35 per share at expiration. The option should be assigned, obligating you to buy PURR stock for $45, which is $10 above its market price. Assuming you immediately sell the shares at $35, the premium you received upfront partially offsets your loss of $10 per share. To calculate your loss per share, subtract the strike price from the price of the stock at expiration, and add the premium you received. In this example, ($35 - $45 + $2 = -$8 per share). So for a contract of 100 shares, you would lose $800.
Keep in mind, this is a theoretical example. Actual gains and losses will depend on factors such as the prices and number of contracts involved.
What is the breakeven point at expiration?
You break even on your cash-covered put, if the stock closes at the strike price of the option minus the premium you received.
Going back to PURR, the breakeven point is ($45 strike price - $2 premium = $43). If the stock closes at this breakeven point on the expiration date, you should neither gain nor lose money. If the stock price falls below $43, you’ll likely experience a loss.
Monitoring
I sold a cash covered put. What can I do next?
When you sell a cash-covered put, there are several potential outcomes up until the expiration date: Buying to close your position, assignment, or expiration.
Buying to Close
By selling a cash covered put option, you “open” a position. You can “close” it by buying back the option. You can choose to do this at any time until it expires, in order to avoid getting assigned. You would then have the possibility of writing another cash covered put, depending on the amount of cash you have available to be held as collateral.
Assignment
Alternatively, the put you sold could get assigned, meaning the buyer decides to exercise their right to sell the shares at the strike price. Remember, since you’re the seller of the put, you can’t exercise it — Only the buyer can do this. If the buyer decides to exercise their put, then you must buy the stock at the strike price. Often, this happens if the stock price is below the strike price at expiration. A put could also be assigned early, but because you sold a cash-covered put, you have already accepted the obligation to buy shares at the strike price and have the cash collateral to do so. After buying the shares, you can sell the shares if you’d like to.
Put Expiration
If the put you sold expires worthless, you keep the premium and can do a few things: Sell another put, buy shares of stock, invest the cash somewhere else, or simply leave it uninvested.
How might market movements affect my position?
Changes in the market can affect the value of your put option and your ability to close it. First, some options may not be as liquid as others. This means there might not be enough sellers to allow you to buy-to-close your position, and your contract’s price might be adversely affected. If your option isn’t very liquid, it can be hard to buy it back for its intrinsic value.
Volatility, a measure of how much and how quickly a stock price changes, can also affect your position. If you sell a covered put, you generally benefit when volatility declines, since the value of the option you sold should also decrease, assuming other factors stay constant. On the other hand, an increase in volatility in the underlying stock can make it more expensive to buy-to-close the position.
If the stock price and volatility stay relatively flat, the value of your cash-covered put option tends to decrease as time passes. As the expiration date nears, it becomes less likely that the stock will drop below the strike price, and more likely that the option will expire worthless, allowing you to keep the premium. Hence, it is generally beneficial for the short position when the option loses value as it approaches expiration.
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