Selling put options is my favourite way to generate income in the stock market on a consistent reliable basis. In this article I’m going to show you how to sell put options for income. I am going to share with you the two main reasons for selling puts, the importance of sufficient premium, implied volatility, and managing trades effectively.
I will also share with you a technique my mentor taught me to help you stick to our golden rule which is to always book profits!
Before continuing and in the spirit of transparency, I am currently generating over $9,000 every month through option and stock trading. This amazing journey has empowered me to leave my traditional job behind and embrace trading as a full-time venture. I genuinely hope that this article proves to be valuable for you. Remember, achieving financial independence is within your reach too!
Table of Contents
What is a put option?
When you sell a put option, you’re selling the person that bought the option from you the right, but not the obligation, to PUT that stock into your account at any time through expiration day. For that risk or insurance, you’re paid what’s called an option premium.
Know Why You’re Selling Puts To Begin With
If you hang around on Twitter (now X) long enough you will come across people saying “only sell puts on stocks you don’t mind owning”.
This is like saying “you should only sleep with people you don’t mind marrying”
Silly idea right?
I realised recently that it’s ok to sell puts just to generate an income.
And this is the first step when it comes to selling put options. Identify why it is you are selling puts and what you want the outcome to be.
The two main reasons for selling cash secured puts
- Selling Puts For Income
- Selling Puts To Buy Stocks At A Discount
Why You Should Sell Puts For Income
The Insurance Company Model
Selling or writing cash secured puts is wildly compared to acting as your own insurance company. Let me explain:
The Insurance Company Analogy A way to think of option selling is to consider yourself running your own insurance company. An insurance company is a lucrative business. As long as it writes (sells) clever insurance policies. The insurance company needs to assess the chances of something happening, think about how much they might lose versus how much they could gain (like comparing the risk of a loss to the money they receive as payment). Then make their decision based on that. To bring this back to option trading; rather than insuring a car, for example, you are insuring the share price of someone’s stock. And if all goes to plan, you can make some very good returns from doing this. What’s more, you don’t even have to ever own the stock! When AXA (or Geico for any US readers) insures your vehicle it’s not with the motive to gain possession of your car at less than the price that you paid for it. AXA is simply trying to make a profit. They are not in the business of owning vehicles! Your goal is simple then: be the most profitable insurance company there is. Where your goal is to collect lots of premium income, and avoid at all costs ever having to pay out a claim! (We do this by either buying back our puts early, or allowing ourselves to be assigned the shares. If we ARE assigned the shares we can aggressively wheel them in a campaign like structure so we come away with a tidy profit still).
So, if you are selling puts with the primary aim of never wanting to own the shares, then be clear about it and try stick to this strategy.
Don’t kid yourself you are selling puts on stocks that you don’t mind owning.
Because owning stocks carries risk.
How To Decide What Stocks To Choose?
Before you decide to sell puts the quality of the stocks should also come in to consideration. I covered a few in one of my most recent articles which looks at some dividend plays but also some tech stocks that pay some fantastic premiums.
Selling Puts And Thinking In Terms Of A Campaign
When you venture into selling puts, it’s important to consider each trade within the context of a broader campaign. In this structure, each campaign possesses its own distinct profit and loss statement and balance sheet.
By adopting this approach, you enable yourself to embrace a long-term perspective, steer clear of emotional impulses, and manage your put selling activities akin to operating a successful one-person business.
Our main goal when selling puts in a campaign structure is never booking a loss.
A campaign is a term my mentor drilled in to me. He described it as a bunch of transactions we make one after the other involving a specific stock.
You don’t have to do this if you don’t want to. You can look at each trade separately, and that’s okay.
But, there’s a big advantage to grouping trades together like this.
It helps you easily see how much money you’ve earned from all the different trades you’ve done with a particular stock.
This information helps you choose the right price for selling covered call options if you are assigned the shares. This way, you can pick a price where, given enough time, it’s unlikely you’ll end up losing money overall if you have to close the campaign.
In short, a campaign is like putting all your trading activities for one stock together in a single report. It helps you track your overall income and make smarter decisions about future option trades.
In simpler words, it’s a way of adding up the money we make from selling secured put options, covered call options, receiving dividends, and the profit or loss from the actual stock, all in one total for that campaign.
Boost Your Profits: Earn 5% Interest and Premiums with IBKR IBKR, the broker I use for option trading, currently pays 5% interest on the cash held in your option trading account. What’s more, if you are selling cash secured puts, you are still able to collect the 5% interest because the cash is sitting there secured in case you are assigned the shares. So you are getting a much better return on cash by collecting the interest and the premiums from selling cash secured puts. This is one reason why I’d rather just sell puts for income Vs owning the shares and then selling covered calls on them. You don't get paid the cash interest on your underlying holdings.
Selling Puts For Income In Crowdstrike Holdings Inc (CRWD)
So now we have established there is no shame in selling puts for a high yield income, with no intention on your part to ever own the underlying shares. Now let’s take a look at a real live trade I did recently and I am still in (as at 8th August 2023).
Below is a trade performance table on Crowdstrike Holdings Inc, ticker symbol CRWD
Now, when starting a campaign in CRWD I never wanted to sell puts in order to buy stocks at discounts. It was a pure income play for me.
I sold puts in CRWD to make some good income and if I were to be assigned I would then switch in to managing my position and repairing it.
As of writing this article my position in CRWD is still open and the stock is trading at $150.97, so still OTM.
Notice my breakeven price after doing two trades in CRWD.
Even if I were assigned the shares at the $145 strike price, my breakeven cost basis is now $136.45. Pretty sweet eh!
So if the stock does go against me I can still end up booking damn good profits on this campaign.
Why is it important to have sufficient premium when selling options?
When selling puts, if the stock has high premiums then that tells you that you are potentially entering a high risk trade.
You also don’t want to be selling puts on stocks where the implied volatility pricing is too low and there is insufficient premiums to be generated.
This also carries it’s own risk too.
Because the premium you collect upfront has a direct impact on how much of a downside protective buffer your trade initially has.
The more premium you receive when selling a cash secured put, the lower your initial breakeven or cost basis per share will be.
It can also be more difficult to manage and repair trades with lower implied volatility levels. This is because there is not enough new time value available to roll your positions out in time or out and down in strike price.
So keep this in mind when looking at the options chain of what stocks to sell puts on.
NOTE: Trading monthly options Vs weekly options generally gives the option seller a larger downside protective cash buffer if the stock goes against them. This is one of the main reasons I prefer monthlies over weeklies.
Why you should look at Implied Volatility (IV)?
If you are looking to sell puts on stocks with implied volatility in the 30s or higher be mindful that the stock is likely going to move around quite a bit.
Stocks with IV in the mid-teens or lower is usually a sweet spot to sell puts on.
If you want to chase more growth orientated stocks with higher IV perhaps consider allocating a smaller percentage of your portfolio to these stocks. You can then focus the rest of the portfolio in more value stocks.
I tend to allocate 20-30% of my portfolio to more growth orientated higher premium stocks. And 70-80% towards more value based stocks that have a strong track record of paying dividends.
You may of course decide that you want to sell puts to acquire shares at a steep discount. This is also a proven and powerful way to use cash secured put options.
Frequently Asked Questions
1. What are examples of cash-secured put strategies?
Examples of cash-secured put strategies are:
1. Writing an at-the-money put: Sell a put option with a strike price close to the current market price of the stock.
2. Writing an out-of-the-money put: Sell a put option with a strike price lower than the current market price of the stock.
2. How to select the right expiration dates?
Selecting appropriate expiration dates is crucial:
1. Shorter-term: Choosing shorter-term expiration dates (e.g., 30 days) allows you to generate income more frequently and benefit from time decay.
2. Longer-term: Longer-term expiration dates (e.g., 60-90 days) may offer higher premiums, but expose you to more market risk.
3. How to maximise income with weekly cash-secured puts?
To maximise income with weekly cash-secured puts:
Focus on high-probability trades: Sell out-of-the-money puts with a low likelihood of being assigned the stock.
Diversify your portfolio: Include various stocks across different sectors to reduce risk.
Monitor market trends: Stay updated on market trends and adjust your strategy accordingly.
4. How do I exit a cash secured put?
Rolling the option: If an option is nearing expiry and assignment is likely, you can roll the option to a later expiration date or lower strike price.
5. What are some good stocks for cash-secured puts in 2023?
I covered this in a recent article, showing 19 of the best stocks to trade cash secured put options on.