Put is an option strategy that works similarly to to the covered call
strategy, but should be used for a bearish outlook instead of a bullish
option-info and options-graphs sites:
Outlook: Mildly bearish. The stock must stay below the price at which
you shorted stock, plus the premium received. But if the stock falls too
much, you miss out on gains beyond the strike price.
short stock, sell put(s), using a strike price below the current
when: stock stays under the price at which stock was shorted, plus
Gain: stock short price - strike price + premium received.
when: stock rises more than the premium received.
Loss : unlimited.
Calculation: Stock short price + premium received.
compared to short stock: Some upside protection.
compared to short stock: cannot participate in gains beyond the strike
after entry, decreasing implied volatility is positive.
after entry, the passage of time is positive.
Requirement: Depends on your broker. Some brokers will treat the
short puts as naked, regardless of your being short the stock. If that
is the case you would require permission for selling naked options, and
a minimum margin of 10% of the strike sold plus premium received, but
use ATM strike for a neutral-to-bearish outlook.
Equivalent: Short Call.
Puts can be used if you want to make some income during a bear market,
while holding short stock for longer term bearish moves.
- You do
not want to be "too" bearish in the near term, since selling
the puts limits your gains to the downside.
Puts are basically the bear market equivalent of Covered Calls. See
Call Strategies Disadvantages
for information concerning the possible pitfalls of the Covered Call
strategy, which also apply to the Covered Put.
this is a mildly bearish position, the trader is expecting the stock
to fall somewhat. If the stock rises instead, the premium brought in
will give a slight "upside protection", but cannot make up
for a large loss in the short stock. If the stock rises by more than
the premium brought in, the safest course of action is to close out
the entire position.
- If the
stock falls, but not beyond the strike price sold, you should continue
to hold the position. You will not realize the maximum gain on the premium
you sold until after the option expires worthless. At that time you
can buy back the stock if you wish, or continue to hold the short stock
and sell more puts using the next expiration.
- If the
stock falls beyond the strike you sold, it is possible you will be "put
to" at any time: someone could exercise puts that they bought and
thereby force you to buy the stock. Buying the stock would effectively
close out the position: you are already short stock, so if you buy stock
it closes out the short stock. If you do not want to risk being put
to, you need to either buy the puts back, or roll them forward or down,
as in the Adjustments.
- A common
recommendation is to roll the short puts when they have lost 80% of
their value due to time decay. This recommendation is actually trying
to catch the point in time when the near term puts have lost most of
their value, but the far term puts are not losing their value as quickly.
If you wait longer so the near term puts lose all their value, then
the longer term puts will probably have lost about as much.
rule of thumb that usually amounts to about the same thing is to roll
when there is just a week left to expiration on the near term puts.
At that time, the puts expiring the next month out will have about five
weeks to their expiration, and will still have decent premium for the
the puts means to buy back the near month puts you are short, and sell
puts further out in time. The new puts you sell do not need to be the
same strike price. If your stock has fallen, you can sell a lower strike
is a type of spread trade, and most brokers give a commission discount
for spread trades. A spread trade means you buy options and sell options
in one transaction. You can also roll by entering two separate trades,
but you will be charged two commissions.