Sell put (Short put)
Writing a put contract will give the holder the right to sell the stock at the strike price. The holder (of American options) may sell the stock at any time before expiration. This strategy resembles the covered call strategy.
Let’s look at an example:
Sell AMZN Put 15 days 195 $4.5o
A trader Bob has a neutral to moderately bullish outlook on AMZN, which is now at 201.48, however Bob feels there will still be a slight price correction and would not enter it at 200 or above. He would buy it at 195. Bob decides to sell 1 AMZN 15 day put for 195 at $4.50.
Figure 1 shows how the break even point is $190.50 for this position.
If the stock price is greater than the strike price Bob will keep the premium paid of $4.50. However if the asset goes below the break even price of 190.50, the position is at loss, and once again risk is unlimited. Profit here is limited to the premium.
If the stock price is less than the strike, Bob will have ownership of the stock by assignment.
In this situation, Bob was able to obtain the stock at a limit price, and keep a premium, this is an effective way of buying at a limit price, and earn a premium on top.
The financial implications of selling a put mean that you need to have enough cash in your account to cover the price of stock at strike price (that is 100 stock per contract).
If you own a short position on the stock, you can also sell a put to cover that position. This is one way to earn a premium in a bullish market, and recover on losses in that short position.
Similarly to how a covered call was not bullish position, a short put is not a bearish position, as long as the stock price is above strike, the premium is a profit.
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